Clarus Securities initiated coverage on Zongshen Power Systems Inc. (OTC:ZNGSF) last week, rating the stock a speculative buy with a target price of C$4.50.
Clarus' optimism hinges on the bullish growth potential for the e-bikes market in China, and from Zongshen Power's specific ability to exploit that growth.
The Chinese e-bike market is the largest in the world, exceeding 17 million units in 2007. Analyst Youssef Abboud expects a continued annual growth rate for the market of 15% over the next five years "driven by rising affordability, higher gas prices, and a supportive regulatory environment," he wrote in a research note.
Mr. Abboud also sees Zongshen Power as ideally positioned to profit from this explosive growth thanks to its unique high-end proprietary technology, and to the existing distribution network of its parent company Zongshen Industrial Group [ZIG] which owns 40% of its capital.
Mr. Abboud said:
ZIG is a growth story and is a play on affordable, green transportation for the masses in China. Acquisitions in the highly fragmented e-bike market and an expanding product portfolio ... could provide additional catalysts for the share price.
He also noted that Zongshen Power is expected to expand its capacity from 200,000 units in 2008 to 800,000 units by early 2009.
The company reported revenues of $6.5 million for Q1 2008, versus $1.8 million in the corresponding quarter in 2007. Volume sales during the first quarter of 2008 totaled 23,413 units, an increase of 263 percent compared with 6,458 units year on year.