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China Nepstar Chain Drugstore Reports First Quarter 2010 Financial Results

Tuesday, May 18, 2010 Corporate News J E 4
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SHENZHEN, China, May 18 China Nepstar ChainDrugstore Ltd. (NYSE: NPD) ("Nepstar" or "the Company"), the largest drugstorechain in China in terms of the number of directly operated stores, with 2,559directly operated stores in operation as of March 31, 2010, today announcedits unaudited financial results for the first quarter ended March 31, 2010.

Mr. Ian Wade, Chief Executive Officer of Nepstar, commented, "Despite theunfavorable pressure brought by the various pricing ceiling policies on someof our products, we continue to achieve solid same store sales growth as ourproduct mix offerings and promotion programs remain attractive to ourcustomers."

"After a difficult 2008, we decided to reward our employees through a one-time bonus for their outstanding performance in 2009. We also provided anoverall salary increase to our employees at both store level and corporatelevel to maintain our competitiveness in retaining our most critical asset --our people. In the meantime, we have accelerated new store openings in Q4,2009 and Q1, 2010, which has resulted in higher operating expenses. Thesemeasures inevitably impacted the first quarter results but we believe we oughtto run the business with a longer term perspective."

First Quarter Results

Revenue for the quarter ended March 31, 2010 was RMB567 million (US$83million), 12.1% higher than revenue for the first quarter of 2009 of RMB506million.

First quarter revenue contribution from prescription drugs was 24.8%,over-the-counter ("OTC") drugs was 36.7%, nutritional supplements was 17.9%,traditional Chinese herbal products was 3.7% and other products was 16.9%.Same store sales (for 2,217 stores opened before December 31, 2008) for thefirst quarter of 2010 increased by 6.9% as compared to the same period in 2009.The increase was mainly attributable to effective marketing campaigns,optimization of product offerings, and the stronger economic environment inChina.

Nepstar's portfolio of private label products included 1,559 products asof March 31, 2010. Sales of private label products represented approximately26.6% of revenue and 39.8% of gross profit for the first quarter of 2010.

Gross profit was RMB272 million (US$40 million) for the first quarter of2010, as compared to RMB244 million for the first quarter of 2009. Grossmargin for the first quarter of 2010 was 48.0%, as compared to 48.2% for thesame period in 2009. The decrease in gross margin was largely due to decreasein the price of products included in the national and provincial medicalinsurance catalogs or in the national essential drug list.

Sales, marketing and other operating expenses as a percentage of revenuefor the first quarter of 2010 increased to 42.9% compared to 41.0% for thefirst quarter of 2009. The increase was primarily due to the one-timecorporate-wide bonus that was accounted for in the first quarter of 2010 andgeneral salary increase for store employees. The increase was also partiallyattributable to the opening of 156 new stores in the fourth quarter of 2009and 104 new stores in the first quarter of 2010 which increased operatingexpenses. Increasing rental costs also contributed to the increase in sales,marketing and other operating expenses. For stores opened before December 31,2008 and still in operation, total rental costs increased by 4% in the firstquarter of 2010 as compared to the same period in 2009.

General and administrative expenses as a percentage of revenue for thefirst quarter of 2010 was 5.8% compared to 4.6% for the first quarter of 2009.The increase was primarily due to the one-time corporate-wide bonus accountedfor in the first quarter of 2010, share based compensation granted toemployees in the first quarter and general salary increase for corporateadministrative employees.

Total bonus accounted for in the first quarter of 2010 amounted to RMB6million (US$0.9 million).

As a result, operating loss for the first quarter of 2010 was RMB4 million(US$0.6 million) compared to operating income of RMB13 million for the firstquarter of 2009.

During the first quarter of 2010, net interest income (interest income netof interest expense) was RMB7 million (US$1 million) and other investmentincome was RMB5 million (US$0.7 million), compared to net interest income ofRMB24 million and other investment income of RMB5 million in 2009. Thedecrease in net interest income was mainly due to (i) the maturity of allheld-to-maturity investment securities which had been earning higher interestincome (ii) a general decrease of interest rates for short-term bank deposits;and (iii) lower cash balances as a result of the dividend payments in 2009.

Nepstar's effective tax rate was 66.8% for the first quarter of 2010,compared to 26.5% for the same period in 2009. The increase in effective taxrate was primarily due to the varying profitability among subsidiary companiesfor the first quarter of 2010, an increase in the deferred tax asset valuationallowance for tax loss carry forwards, the benefits of which the Companycurrently does not expect to be realizable and the increase in transitionaltax rate from 20% in 2009 to 22% in 2010 for subsidiaries in Shenzhen.

Net income in the first quarter 2010 was RMB2.6 million (US$0.4 million),or RMB0.02 basic earnings per American depositary share (the "ADS"), andRMB0.02 diluted earnings per ADS. This compares to net income of RMB30 million,or RMB0.30 basic and RMB0.28 diluted earnings per ADS, for the first quarterof 2009. The total number of outstanding ordinary shares for the Company as ofMarch 31, 2010 was 211 million. The weighted average number of ADSs for thefirst quarter of 2010 was 105 million. One ADS represents two ordinary shares.

As of March 31, 2010, the Company's total cash, cash equivalents andcurrent bank deposits were RMB1,142 million (US$167 million), long term bankdeposits were RMB200 million (US$29 million) and total shareholders' equitywas RMB1,588 million (US$233 million).

On March 3, 2010, the Company announced that the Board of Directorsdeclared a cash dividend of US$0.28 per ADS. The cash dividend was paid duringthe first half of May 2010 to shareholders of record as of the close ofbusiness on April 2, 2010.

First Quarter Operating Highlights

In the first quarter of 2010, Nepstar added 104 new stores and closed 24stores. As of March 31, 2010, Nepstar had a total of 2,559 stores inoperation.

Nepstar has initiated strategic collaboration with certain world-leadingfast moving consumer goods companies to design and remodel a new type ofhealth and beauty concept store for the Company. Such concept stores willallocate half of the display space of a Nepstar store to health and beautyproducts while maintaining the core product offerings of a conventionalNepstar store. Such concept stores will also have more modern interior decorand is aimed to attract a broader base of customers.

In addition, since the fourth quarter of 2009, Nepstar has introducedapproximately 70 new Stock Keeping Units ("SKUs") of consumables and organicfood products as of March 31, 2010. These new products are now sold throughhalf of the Company's stores and contributed RMB7 million to the Company'srevenue in the first quarter of 2010.

Business Outlook

Mr. Wade commented, "We remain cautious about the pressure on ouroperating expense for the remaining quarters of the year as various provincialgovernments are issuing minimum wage policies, which are affecting our laborcosts. Also, we expect continued pressure as to store rental costs."

"Such cost pressure is calling for us to focus even more on theproductivity of the stores. We expect the gross margin to improve in thesecond quarter as we continue optimizing our product offerings betweenproducts that are subject to price ceiling and products that are not so as tostrike the proper balance between maintaining the breadth of our productofferings and the overall gross margin. We are also expanding our productofferings in health and beauty as well as organic food categories at a muchquicker pace to attract customers and to become less reliant on pharmaceuticalproducts. We continue to focus on growing same store sales along withstrengthening customer relationships."

"We remain hopeful that the recent pricing policy by the Chinesegovernment will shake out a number of small competitors who have already beensuffering loss in the past few quarters."

Conference Call Information

The Company will host a conference call, to be simultaneously Web cast, onTuesday, May 18, 2010 at 8:00 a.m. Eastern Daylight Time / 8:00 p.m. BeijingTime. Interested parties may participate in the conference call by dialing+1-877-407-8033 (North America) or +1-201-689- 8033 (International)approximately five to ten minutes before the call start time. A live Webcast of the conference call will be available on the Nepstar Web site athttp://www.nepstar.cn .

A replay of the call will be available starting on May 18, 2010, at 11:00a.m. Eastern Daylight Time or 11:00 p.m. Beijing Time through May 28, 2010 at11:59 p.m. Eastern Daylight Time or May 29, 2010 at 11:59 a.m. Beijing Time.An archived Web cast of the conference call will be available on the NepstarWeb site at http://www.nepstar.cn . Interested parties may access the replayby dialing +1-877-660-6853 (North America) or + 1-201-612-7415 (International)and entering account number 286 and conference ID number 349559.

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 of March31, 2010, the Company had 2,559 stores across 74 cities, one headquarterdistribution center and 13 regional distribution centers in China. Nepstaruses directly operated stores, centralized procurement and a network ofdistribution centers to provide its customers with high-quality, professionaland convenient pharmacy services and a wide variety of other merchandise,including OTC drugs, nutritional supplements, herbal products, personal careproducts, family care products, and convenience products including consumables.Nepstar's strategy of centralized procurement, competitive pricing, customerloyalty programs and private label offerings has enabled it to capitalize onthe robust economic growth in China and to take advantage of the demographictrend in China to achieve a strong brand and leading market position. Forfurther information, please go to http://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$1.00 = RMB6.8258 on March 31,2010 as set forth in the H.10 weekly statistical release of the FederalReserve Board. No representation is made that the RMB amounts could have been,or could be, converted into US$ at that rate on March 31, 2010, or at anyother date. The percentages stated are calculated based on RMB amounts.Financial Highlights For the quarter ended March 31, 2010: -- Revenue was RMB567 million (US$83 million), reflecting a 12.1% increase compared to revenue of RMB506 million in the first quarter of 2009 -- Same store sales increased by 6.9% -- Net income was RMB2.6 million (US$0.4 million) -- Net cash flow from operations was RMB35 million (US$5 million)

SOURCE China Nepstar Chain Drugstore Ltd.
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