Hong Kong Highpower Technology, Inc. (Hong Kong Highpower) has reported net sales of $75 million for the year-end 2008, up 2.4%, compared with the net sales of $73.3 million in the previous year-end. It has also reported a net income of $2 million, or 0.15 cents per share, for the year-end 2008, up 20.6%, compared with the net income of $1.7 million, or 0.17 cents per share, in the previous year-end.

Business Highlights:

Generated gross margin of 17.0% on net sales of $75.0 million for 2008;

Maintained a healthy capital structure for ongoing growth initiatives and expansion plans;

Continued production ramp of lithium-ion (Li-ion) batteries to average monthly production rate of 400,000 units for fourth quarter 2008; and

Continued construction of new nickel-metal hydride (Ni-MH) facility in Huizhou, Guangdong Province, PRC.

George Pan, chairman and chief executive officer of Hong Kong Highpower, said, Despite challenging industry conditions brought on by the credit crisis and recessionary economy, we met our sales target and exceeded our gross margin target for 2008. However, our net income of $0.15 per diluted share was impacted by higher share count and G&A expenses as a result of being a publicly traded company in 2008.

Going forward through this period of weaker overall market demand, we expect to be well-positioned to avoid sharp margin erosion due to our modern manufacturing processes, strong economies of scale and low cost structure. With the construction of our new Ni-MH facility, we intend to expand our production capacity and increase productivity and efficiency in the manufacturing process to reduce the per-unit cost of production. While we do expect the implications of the current environment to impact our sales volume in 2009, we remain a supplier of choice through our diverse offering of high quality, well-priced products and our ability to respond quickly to changing customer demands. We are maintaining excellent customer relations while proactively building our capacity so that we will be in a competitively advantageous position once demand re-accelerates and spending improves.

Full Year 2008 Financial Results:

The year-over-year increase was due to the mixed effect of higher average selling price and partially offset by decrease in volume.

Gross profit for 2008 increased 34.8% to $12.8 million, compared with $9.5 million for 2007. Gross margin was 17.0% for 2008, compared with 12.9% for 2007. The year-over-year improvement in gross margin primarily reflects a stabilization of the market cost of nickel since September 2007.

Selling and distribution costs were $2.4 million for 2008, compared with $2.1 million for 2007. The increase in selling and distribution costs was primarily due to the expansion of the company’s sales force. The company’s market share decrease is attributable to the decreased demand for products due to the global economic downturn and challenging economic conditions.

General and administrative expenses, including stock-based compensation, were $6.1 million or 8.1% of net sales 2008, compared to $3.5 million or 4.7% of net sales for 2007. The year-over-year increase as a percentage of net sales was due to increased labor costs, costs associated with the company’s continuing obligations as a public company as a result of its June 2008 initial public offering of common stock and listing on the NYSE Amex (formerly the American Stock Exchange), and stock-based compensation expenses.

Hong Kong Highpower reported a loss on the exchange rate difference between the US Dollar (USD) and the Renminbi (RMB) of $1.2 million for 2008 compared with $855,000 for 2007.

Hong Kong Highpower recorded a provision for income taxes of $529,000 for 2008 compared with $145,000 for 2007.

Fourth Quarter 2008 Financial Results:

Net sales for the fourth quarter ended December 31, 2008 totaled $17.7 million, a year-over-year decrease of 17.3% compared with $21.3 million for the fourth quarter ended December 31, 2007, and a quarter-over-quarter decrease of 13.7% compared with $20.4 million for the third quarter 2008.

Fourth quarter 2008 gross profit increased 7.2% to $3.2 million, compared with $2.9 million for the fourth quarter 2007. On a sequential basis, fourth quarter gross profit decreased 9.7%, compared with $3.5 million for the third quarter 2008. Gross margin was 17.9% for the fourth quarter 2008, compared with 13.8% for the fourth quarter 2007 and 17.2% for the third quarter 2008. The improvement in each period reflects a stabilization of the market cost of nickel since September 2007.

Selling and distribution costs were $655,000 for the three months ended December 31, 2008, compared with $516,000 for the comparable period in 2007 and $800,000 for the third quarter 2008. The increase in selling and distribution costs was primarily due to the expansion of the company’s sales force.

General and administrative expenses, including stock-based compensation, were $1.8 million or 10% of net sales for the three months ended December 31, 2008, compared to $0.9 million, or 4.3% of net sales for the fourth quarter 2007, and $1.9 million or 9.4% of net sales for the third quarter 2008. The year-over-year increase as a percentage of net sales was due to increased labor costs, costs associated with the company’s continuing obligations as a public company and stock-based compensation expenses.

Hong Kong Highpower reported a loss on the exchange rate difference between the USD and the RMB of $187,000 for the three months ended December 31, 2008. This compares with losses on the exchange rate difference of $470,000 and $159,000 for the fourth quarter 2007 and the third quarter 2008, respectively.

Hong Kong Highpower recorded a provision for income taxes of $262,000 for the fourth quarter 2008, compared with provisions for income taxes of $35,000 for the fourth quarter 2007 and $36,000 for third quarter 2008.

Net income for the fourth quarter of 2008 was $303,000, or $0.02 per diluted share, based on 13.7 million weighted average shares outstanding. This compares with fourth quarter 2007 net income of $154,000 or $0.01 per diluted share, based on 11.6 million weighted average shares outstanding, and third quarter 2008 net income of $290,000, or $0.02 per diluted share, based on 13.6 million weighted average shares outstanding.

Non-GAAP Financial Results:

EBITDA for the year ended December 31, 2008 totaled $4.1 million, compared with $3.1 million for the year ended December 31, 2007. The increase was due to in part to a 40% decrease in the average cost of nickel for 2008 compared to 2007.

EBITDA for the fourth quarter ended December 31, 2008 totaled $1 million, compared with $596,000 for the fourth quarter 2007. The increase was due to in part to the decreased cost of nickel in 2008.

Balance Sheet:

At December 31, 2008, Hong Kong Highpower had cash and cash equivalents and restricted cash totaling $9 million, total assets of $43.3 million, working capital of $4.3 million and stockholders’ equity of $16.3 million. Bank credit facilities totaled $23.2 million at December 31, 2008, of which $8.4 million was available as unused credit.

Hong Kong Highpower is a China-based developer, manufacturer and marketer of nickel-metal hydride (Ni-MH) and lithium-ion (Li-ion) batteries and related products.