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Financial Highlights
In January 2009, Nepstar terminated a voting rights assignment agreement,which assigned 30% of the total voting rights of Yunnan JianZhiJia ChainDrugstore Co. Ltd. ("JZJ") to Nepstar. As of December 31, 2008, JZJ had 355drugstore outlets, all located in the Yunnan province. As a result, Nepstar nolonger consolidated JZJ's financials beginning in the first quarter of 2009,and the financial results of JZJ were accounted for under the equity method.
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To facilitate comparability of figures between periods presented, proforma financial information is presented to show the accounting impact of thetermination of the voting rights assignment agreement as if that had takenplace in the beginning of the relevant period.
"Our continuous efforts to improve store merchandise offerings and growfoot traffic have started to show encouraging results," commented Mr. Ian Wade,Chief Executive Officer of Nepstar. "As the Chinese economy continues torecover, we are encouraged by rising consumer spending in the healthcaresector. The value of our combination of quality products, reliable service andmaximum convenience is becoming more and more recognized by communityresidents."
Third Quarter Results
During the third quarter of 2009, the Company opened 47 new stores andclosed 22 stores. As of September 30, 2009, Nepstar had a total of 2,337stores in operation.
Revenue for the third quarter of 2009 was RMB556 million (US$81 million),compared to RMB613 million for the same period in 2008, and RMB515 million forsame period in 2008 on a pro forma basis.
For the third quarter of 2009 revenue contribution from prescription drugswas 22.0%, from over-the-counter ("OTC") drugs was 36.7%, from nutritional
supplements was 21.6%, from traditional Chinese herbal products was 3.4% andfrom other products was 16.3%.
Same store sales (for the 1,589 stores opened before December 31, 2007)for the third quarter of 2009 increased by 3.8% from the same period in 2008.The increase was mainly due to streamlining of operations and furtheroptimization of product mix and recovery of the overall Chinese economy.
Nepstar's portfolio of private label products included 1,499 products asof September 30, 2009. Sales of private label products representedapproximately 30.1% of revenue and 44.4% of gross profit for the third quarterof 2009.
For the third quarter of 2009, gross profit was RMB276 million (US$40million), compared to RMB298 million for the same period in 2008 and RMB267million for the same period in 2008 on a pro forma basis. Gross margin for thethird quarter of 2009 was 49.6% compared to 48.6% for the same period in 2008and 51.8% for the same period in 2008 on a pro forma basis. The decrease ingross margin for the third quarter of 2009 compared with the same period in2008 on a pro forma basis was mainly due to expansion of the breadth ofproduct offerings and price ranges to maintain competitiveness and addressevolving consumer consumption patterns.
Sales, marketing and other operating expenses as a percentage of revenuefor the third quarter of 2009 decreased to 38.4% compared to 41.1% for thesame period in 2008 and 43.4% for the same period in 2008 on a pro forma basis.This decrease was primarily due to implementation of effective cost controlmeasures, which resulted in a reduction in headcount and a reduction in rentalexpenses. The decrease was also due to the closing of non-performing stores.
General and administrative expenses as a percentage of revenue for thethird quarter of 2009 were 5.1% compared to 4.4% for the same period in 2008and 5.0% for the same period in 2008 on a pro forma basis. This increasecompared to the same period in 2008 on a pro forma basis was primarily due toincreased labor costs associated with the recruitment of additional middle andsenior management.
As a result of previously mentioned factors, operating income for thethird quarter of 2009 increased to RMB34 million (US$5 million) compared toRMB19 million for the same period in 2008 and RMB18 million for the sameperiod in 2008 on a pro forma basis. Operating margin improved to 6.1% for thethird quarter of 2009, from 3.4% for the third quarter of 2008 on pro formabasis, and subsequently improved from 4.1% for the second quarter of 2009.
Interest income for the third quarter of 2009 was RMB17 million (US$2million) compared to RMB30 million for the same period in 2008 on a pro formabasis. The decrease in interest income was primarily due to (i) the maturityof a majority of the held-to-maturity investment securities of which theproceeds were placed in bank deposits; (ii) a general decrease of interestrates for bank deposits; and (iii) lower cash balances as a result of thedividend payment of approximately RMB248 million in May 2009.
Nepstar's effective tax rate was 28.4% for third quarter of 2009, comparedto 26.7% for the same period in 2008 on pro forma basis. The increase ineffective tax rate was primarily due to relatively higher portion of Nepstar'staxable profits being generated by subsidiaries subject to the PRC statutorytax rate, rather than the preferential rate.
Net income for the third quarter of 2009 was RMB37 million (US$5 million),which represented RMB0.18 (US$0.03) basic and diluted earnings per ordinaryshare and RMB0.35 (US$0.05) basic and diluted earnings per American depositaryshare ("ADS"). This compares to net income of RMB36 million, which representedRMB0.17 basic and RMB0.16 diluted earnings per ordinary share and RMB0.34basic and RMB0.32 diluted earnings per ADS for the same period in 2008. Thetotal number of outstanding ordinary shares of the Company as of September 30,2009 was 210 million. The weighted average number of ADSs for the thirdquarter of 2009 was 105 million. Each ADS represents two ordinary shares ofthe Company.
As of September 30, 2009, Nepstar's total cash, cash equivalents andcurrent bank deposits were RMB1,807 million (US$265 million), long-term bankdeposits were RMB200 million (US$29 million), held-to-maturity investmentsecurities were RMB400 million (US$59 million) and total shareholders' equitywas RMB1,735 million (US$254 million).
Mr. William Dai, the Chief Financial Officer of Nepstar, stated, "Wecontinue to exercise financial discipline on cost control and cash flowmanagement. Our ability to consistently generate strong free cash flowdemonstrates that our financial health strengthened throughout the economicrecovery, and paves the way for the further expansion of our store network in2010."
On August 24, 2009, Nepstar declared a special dividend of US$1.50 per ADS,or approximately US$156 million. Around December 1, 2009, the special cashdividend was paid out to shareholders of record as of the close of business onSeptember 25, 2009.
Latest Developments and Business Outlook
In July 2009, Nepstar entered into a definitive agreement with Beijing ZeRun Tang Drugstore, to acquire its five drugstores in Beijing. Thisacquisition represents Nepstar's first retail presence in Beijing. The fivestores have an average store size of 170 square meters, and are located indensely populated residential areas in Beijing. The acquisition was completedand the stores have been transferred to Nepstar by end of November and areserviced by the Company's regional logistics center in Tianjin, where Nepstarhas over 100 stores.
In October 2009, Nepstar entered into a definitive agreement with WenzhouRen Ren Hao Chain Drugstore Ltd. ("Ren Ren Hao") to acquire the operations ofall of its eight drugstores in Wenzhou City. This acquisition represents ChinaNepstar's first retail presence in Wenzhou, one of the most affluent marketsin Zhejiang province in terms of consumption power. The eight Ren Ren Haodrugstores have an average store size of 250 square meters and are located inthe city center or in prime locations in nearby major townships. Thetransaction is expected to be completed by the end of 2009.
In November 2009, Nepstar entered into a strategic cooperation agreementwith ATMU (China) Technology Co., Ltd., a subsidiary of ATMU Inc., one of thelargest ATM operators in China, to install ATMs in Nepstar stores. Thiscooperation is not only designed to provide convenience to customers andgenerate rental revenue for Nepstar, but will also help increase store trafficand accelerate the development of electronic payment services at Nepstarstores. ATMU plans to complete the initial 1,000 ATM installations inNepstar's existing stores by end of 2010.
Mr. Wade commented, "Our strategy to increase overall revenues includesopening additional stores in selective areas of China, where economic trendsare more favorable; establishing presence in lucrative markets throughacquisitions; improving product mix; and increasing marketing and co-marketingprograms to grow foot traffic. We are delighted to see our efforts tostrengthen our product selection and broaden our price range result inpositive same store sales growth and increased store traffic, which hascontinued into October and November."
Mr. Wade continued, "In general, we remain cautiously optimistic about theeconomic recovery and are pleased to see some positive elements comingtogether. The Chinese government's implementation of the Essential Drug Listhas had an adverse effect on many smaller drugstore chains. However, we atNepstar view healthcare reform as a strategic opportunity to leverage ourlarge retail network. We are also more optimistic on the outlook foracquisitions, as we expect more smaller-sized competitors may look to exit thesector due to increasing margin erosion on Essential Drug List products whichmay lead to their worsened financial conditions."
Conference Call Information
The Company will host a conference call, to be simultaneously Web cast, onTuesday, December 1, 2009 at 8:30 a.m. Eastern Standard Time / 9:30 p.m.Beijing Time. Interested parties may participate in the conference call bydialing +1-877-407-9210 (North America) or +1-201-689-8049 (International)approximately five to ten minutes before the call start time. A live Web castof the conference call will be available on the Nepstar Web site athttp://www.nepstar.cn .
A replay of the call will be available through December 11, 2009 at 11:59p.m. Eastern Standard Time or December 12, 2009 at 12:59 p.m. Beijing Time. Anarchived Web cast of the conference call will be available on the Nepstar Website at http://www.nepstar.cn . Interested parties may access the replay bydialing +1-877-660-6853 (North America) or + 1-201-612-7415 (International)and entering account number 286 and conference ID number 337391.
About China Nepstar Chain Drugstore Ltd.
China Nepstar Chain Drugstore Ltd. (NYSE: NPD) is China's largest retaildrugstore chain based on the number of directly operated stores. As ofSeptember 30, 2009, the Company had 2,337 stores across 67 cities, oneheadquarter distribution center and 12 regional distribution centers in China.Nepstar uses directly operated stores, centralized procurement and a networkof distribution centers to provide its customers with high-quality,professional and convenient pharmacy services and a wide variety of othermerchandise, including OTC drugs, nutritional supplements, herbal products,personal care products, family care products, and convenience productsincluding consumables. Nepstar's strategy of centralized procurement,competitive pricing, customer loyalty programs and private label offerings hasenabled it to capitalize on the robust economic growth in China and to takeadvantage of the demographic trend in China to achieve a strong brand andleading market position. For further information, please go tohttp://www.nepstar.cn .
Safe Harbor Statement
This press release contains forward-looking statements. These statementsconstitute "forward-looking" statements within the meaning of Section 21E ofthe Securities Exchange Act of 1934, as amended, and as defined in the U.S.Private Securities Litigation Reform Act of 1995. These forward-lookingstatements can be identified by terminology such as "will," "expects,""anticipates," "future," "intends," "plans," "believes," "estimates" andsimilar statements. Among other things, the quotations from management in thispress release and the Company's strategic operational plans and businessoutlook, contain forward-looking statements. Such statements involve certainrisks and uncertainties that could cause actual results to differ materiallyfrom those in the forward-looking statements. Further information regardingthese and other risks is included in the Company's filings with the U.S.Securities and Exchange Commission, including its annual report on Form 20-F.The Company does not undertake any obligation to update any forward-lookingstatement as a result of new information, future events or otherwise, exceptas required under applicable law.
Exchange Rate Information
The United States dollar (US$) amounts disclosed in this press release arepresented solely for the convenience of the reader. Translations of amountsfrom RMB into United States dollars for the convenience of the reader werecalculated at the certified exchange rate of US$1.00 = RMB6.8262 on September30, 2009 as set forth in the H.10 weekly statistical release of the FederalReserve Board. No representation is made that the RMB amounts could have been,or could be, converted into US$ at that rate on September 30, 2009, or at anyother certain date. The percentages stated are calculated based on RMB.For the quarter ended September 30, 2009: -- Revenue increased 8.0% to RMB556 million (US$81 million) compared to RMB515 million in the third quarter of 2008 on a pro forma basis -- Operating income rose 92.1% to RMB34 million (US$5 million) compared to RMB18 million in the third quarter of 2008 on a pro forma basis -- Net income was RMB37 million (US$5 million) -- Net cash flow from operations was RMB93 million (US$14 million)
SOURCE China Nepstar Chain Drugstore Ltd.
