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China Nepstar Chain Drugstore Reports Fourth Quarter and Fiscal Year 2009 Financial Results

Wednesday, March 3, 2010 Press Release J E 4
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SHENZHEN, China, March 3 China NepstarChain Drugstore Ltd. (NYSE: NPD) ("Nepstar" or "the Company"), the largestretail drugstore chain in China based on the number of directly operatedstores, today announced its unaudited financial results for the fourth quarterand the fiscal year ended December 31, 2009.

"Our strategy of enhancing product offerings and improving store operationefficiencies is working. Our fourth quarter was highlighted by the continuedimprovement in same store sales and a healthy recovery in new store openings,"commented Mr. Ian Wade, Chief Executive Officer of Nepstar. "As healthcarereform and economic development continued to progress and the size of middleclass consumers continued to grow in China, we have seen an increased consumerspending on healthcare products. In the fourth quarter of 2009, we are pleasedto see steady increases in our sales of prescription and over-the-counter("OTC") drugs listed on the Essential Drug List ("EDL"), as well as non-EDLpharmaceutical and nutritional products. Our customers continue to enjoy ourselection of products, quality services and the convenience we bring."

Fourth Quarter Results

During the fourth quarter of 2009, the Company opened 156 new stores andclosed 14 stores. As of December 31, 2009, Nepstar had a total of 2,479 storesin operation.

Revenue for the fourth quarter of 2009 was RMB621 million (US$91 million),compared to RMB656 million for the same period in 2008, and RMB551 million forsame period in 2008 on an adjusted basis.

For the fourth quarter of 2009, revenue contribution from prescriptiondrugs was 27.0%, OTC drugs was 36.4%, nutritional supplements was 19.7%,traditional Chinese herbal products was 3.3% and other products was 13.6%. Thehigher contribution from sales of prescription drugs was mainly due to thesurge of antibiotics sales related to the H1N1 epidemic.

Same store sales (for the 1,577 stores opened before December 31, 2007)for the fourth quarter of 2009 increased by 10.5% from the same period in 2008.The increase was mainly attributable to higher level of prescription and OTCdrug sales related to the H1N1 epidemic. The increase was also attributable tothe Company's effective marketing campaigns, streamlining of store operations,further optimization of product mix, as well as the general recovery of theChinese economy.

Nepstar's portfolio of private label products included 1,524 products asof December 31, 2009. Sales of private label products representedapproximately 28.7% of revenue and 43.4% of gross profit for the fourthquarter of 2009.

For the fourth quarter of 2009, gross profit was RMB298 million (US$44million), compared to RMB299 million for the same period in 2008 and RMB272million for the same period in 2008 on an adjusted basis. Gross margin for thefourth quarter of 2009 was 47.9% compared to 45.6% for the same period in 2008and 49.4% for the same period in 2008 on an adjusted basis. The decrease ingross margin for the fourth quarter of 2009 compared with the same period in2008 on an adjusted basis was mainly due to the expansion of the breadth ofproduct offerings and price ranges to maintain competitiveness, and higherbranded product sales associated with the H1N1 epidemic.

Sales, marketing and other operating expenses as a percentage of revenuefor the fourth quarter of 2009 was 37.1%, compared to 36.2% for the sameperiod in 2008 and 38.6% for the same period in 2008 on an adjusted basis. Thedecrease in sales, marketing and other operating expenses as a percentage ofrevenue for the fourth quarter of 2009 compared to the same period in 2008 onan adjusted basis was primarily due to the implementation of effective costcontrol measures, which resulted in a reduction of headcount, closure of non-performing stores and improved economies of scale.

General and administrative (G&A) expenses as a percentage of revenue forthe fourth quarter of 2009 were 4.1%, compared to 3.6% for the same period in2008 and 4.1% for the same period in 2008 on an adjusted basis.

As a result of the previously mentioned factors, operating income for thefourth quarter of 2009 increased to RMB42 million (US$6 million), compared toRMB38 million for the same period in 2008 and RMB37 million for the sameperiod in 2008 on an adjusted basis. Operating margin improved from 6.1% inthe third quarter to 6.7% for the fourth quarter of 2009, compared to 5.9% forthe same period in 2008 and 6.7% for the same quarter of 2008 on an adjustedbasis.

Interest income for the fourth quarter of 2009 was RMB15 million (US$2million) compared to RMB27 million for the same period in 2008 both on anactual basis and on an adjusted basis. The decrease in interest income wasprimarily due to (i) the maturity of a majority of the held-to-maturityinvestment securities of which the proceeds were placed in bank deposits; (ii)a general decrease of interest rates for bank deposits; and (iii) lower cashbalances as a result of the dividend payment of approximately RMB248 million(US$36 million) in May 2009 and a special dividend payment of approximatelyRMB1,034 million (US$151 million) in fourth quarter of 2009.

Other income in 2009 of RMB9 million (US$1 million) represented a gain ondeconsolidation of Yunnan JianZhiJia Chain Drugstore Co. Ltd. ("JZJ"), whichequaled to the excess of fair value of the Company's 40% non-controllinginterest in JZJ over its book value.

Nepstar's effective tax rate was 35.3% for the fourth quarter of 2009,compared to 27.6% for the same period in 2008 and 27.7% on an adjusted basis.The increase in effective tax rate was primarily due to the deferred taxliability recognized for the excess of the accounting carrying amount over thetax basis of equity interest in JZJ, which amounted to RMB7 million (US$1million) and accounted for 5.7% of the increase in effective tax rate.Excluding this effect, the effective tax rate was 29.6%, which was due to therelatively higher portion of Nepstar's taxable profits being generated bysubsidiaries subject to the PRC statutory tax rate, rather than thepreferential rate.

Net income attributable to Nepstar's ordinary shareholders for the fourthquarter of 2009 was RMB43 million (US$6 million), which represented RMB0.20 (US$0.03) basic and diluted earnings per ordinary share and RMB0.40 (US$0.06)basic and diluted earnings per American depositary share ("ADS"). Thiscompares to net income of RMB46 million, which represented RMB0.22 basic anddiluted earnings per ordinary share and RMB0.44 basic and diluted earnings perADS for the same period in 2008. The total number of outstanding ordinaryshares of the Company as of December 31, 2009 was 210 million. The weightedaverage number of ADSs for the fourth quarter of 2009 was 105 million. EachADS represents two ordinary shares of the Company.

As of December 31, 2009, Nepstar's total cash, cash equivalents and otherbank deposits were RMB666 million (US$98 million), restricted cash was RMB765million (US$112 million), held-to-maturity investment securities were RMB400million (US$59 million) and total shareholders' equity was RMB1,778 million(US$260 million). Short-term loans stood at RMB470 million (US$69 million),which were the bank borrowings utilized to pay the special dividend, sincesome investment securities and fixed deposits had not yet matured. Bankdeposits of RMB750 million were pledged to obtain the short-term bank loansand credit facilities. As of the date of this press release, the short-termloans have been repaid and the restriction on the pledge bank deposits hasbeen released. The net cash provided by operating activities during the fourthquarter of 2009 was RMB31 million (US$4.5 million).

Fiscal Year 2009 Financial Results

Total revenues for 2009 was RMB2,218 million (US$325 million) compared toRMB2,397 million for 2008, and RMB2,014 million for 2008 on an adjusted basis.

Same store sales (for stores opened before December 31, 2007) for 2009increased by 2.6% compared to 2008. Since the second quarter of 2009, Nepstarundertook a series of measures to boost same stores sales, including expandingproduct offerings, adjusting price ranges, streamlining store operation andenhancing marketing campaigns. As a result, same store sales experienced a3.8% increase in the third quarter, and a 10.5% increase in the fourth quarter,respectively.

In 2009, revenue contribution from prescription drugs was 23.2%, OTC drugswas 36.9%, nutritional supplements was 20.6%, herbal products was 3.6%, andother products was 15.7%.

In 2009, private label products accounted for 29.0% of total revenue and43.3% of gross profit, respectively. This compares to 28.4% of revenuecontribution and 40.6% of gross profit contribution by private label productsin 2008 on an adjusted basis.

Gross profit was RMB1.1 billion (US$157 million) for 2009 compared toRMB1.1 billion for 2008 and RMB1.0 billion for 2008 on an adjusted basis. In2009, gross margin was 48.4% compared to 47.5% in 2008, and 50.8% in 2008 onan adjusted basis. The decrease in gross margin for 2009 compared to 2008 onan adjusted basis was mainly due to the expansion of the breadth of productofferings and more proactive marketing approach to maintain competitiveness.

Income from operations was RMB110 million (US$16 million) for 2009compared to RMB141 million for 2008, and RMB128 million for 2008 on anadjusted basis. Total operating expenses accounted for 43.5% of total revenuein 2009 as compared to 41.6% in 2008, and 44.4% in 2008 on an adjusted basis.This improvement was largely due to stringent cost control measurement, storeefficiency enhancement, and closure of some non-performing stores. As a result,operating margin was improved from 2.6% in the first quarter of 2009, to 4.1%in the second quarter, 6.1% in the third quarter, and 6.7% in the fourthquarter.

Net income attributable to Nepstar's ordinary shareholders was RMB140million (US$21 million) for 2009 compared to RMB193 million for 2008. TheCompany reported RMB1.34 (US$0.20) basic earnings per ADS, and RMB1.32 (US$0.20) diluted earnings per ADS for 2009. This compares to RMB1.80 basicearnings per ADS and RMB1.76 diluted earnings per ADS for 2008. In comparisonwith 2008, Nepstar's lower net income was mainly due to lower interest income,which was attributable to (i) the maturity of a majority of the held-to-maturity investment securities of which the proceeds were placed in bankdeposits; (ii) a general decrease of interest rates for bank deposits; and(iii) lower cash balances as a result of the dividend payment of approximatelyRMB248 million (US$36 million) in May 2009 and special dividend payment ofapproximately RMB1,034 million (US$151 million) in the fourth quarter of 2009.

On March 16, 2009, Nepstar declared a cash dividend of US$0.35 per ADS, orapproximately RMB248 million. The cash dividend was paid in May 2009, toshareholders of record as of the close of business on April 16, 2009.

On August 24, 2009, Nepstar declared a special dividend of US$1.50 per ADS.In November and December 2009, approximately RMB1,034 million (US$151 million)was paid out to shareholders of record as of the close of business onSeptember 25, 2009.

On March 2, 2010, the three independent directors of the Companyvoluntarily forfeited options to purchase an aggregate of 150,000 ordinaryshares of the Company at an exercise price of US$8.10 per ordinary share(US$16.2 per ADS), which were granted in November 2007, and waived the rightto certain payments from the Company, which provided for a minimum return fromthe exercise of such options. In exchange, the Company granted the independentdirectors an aggregate of 150,000 restricted ordinary shares, which vestedimmediately. In addition, 50,000 restricted ordinary shares of the Companysubject to a vesting schedule were granted to an executive of the Company. Theexchange and grants were conducted to provide additional incentive andretention value and was approved by the board of directors of the Company andits compensation committee.

Latest Developments and Business Outlook

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 was completed in February 2010 with the eight stores transferredto Nepstar.

In December 2009, Nepstar entered into a definitive agreement with BeijingXiang Yun Kang Drugstore, to acquire all of its six drugstores in Beijing.This acquisition will be Nepstar's second acquisition in Beijing. The sixdrugstores are all located in densely populated residential areas in Beijing.The transaction was completed in February 2010 with the six stores transferredto Nepstar.

Mr. Wade concluded, "In 2010, we will continue to focus on executing ourstrategy of improving store efficiencies and enhancing product offerings. Ourclose attention to same store sales, operating margin and free cash flowgeneration remains unchanged. We will be more active in opening and acquiringstores in areas where economic trends are favorable. With more smaller-sizedcompetitors struggling with margin erosion as a result of healthcare reform inChina, the consolidation of the fragmented drugstore industry is bound toaccelerate. We believe Nepstar is well-positioned to capture opportunitiesbrought by the evolving competition landscape."

Conference Call Information

The Company will host a conference call, to be simultaneously Web cast, onWednesday, March 3, 2010 at 8:00 a.m. Eastern Standard Time / 9:00 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 March 13, 2010 at 11:59 p.m.Eastern Standard Time or March 14, 2010 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 344868.

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 ofDecember 31, 2009, the Company had 2,479 stores across 71 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$1.00 = RMB6.8259 on December31, 2009 as set forth in the H.10 weekly statistical release of the FederalReserve Board. No representation is made that the RMB amounts could have been,or could be, converted into US$ at that rate on December 31, 2009, or at anyother date. The percentages stated are calculated based on RMB amounts.Fourth Quarter Financial Highlights For the quarter ended December 31, 2009: -- Same store sales grew 10.5% compared to the same period in 2008 -- Revenue increased 12.8% to RMB621 million (US$91 million) compared to RMB551 million in the fourth quarter of 2008 on an adjusted basis(1) -- Operating income rose 13.0% to RMB42 million (US$6 million) compared to RMB37 million in the fourth quarter of 2008 on an adjusted basis -- Net income was RMB43 million (US$6 million) -- Net cash flow from operations was RMB31 million (US$4.5 million) (1) Effective January 5, 2009, Nepstar terminated a voting rights agreement, which assigned 30% of the total voting rights of Yunnan JianZhiJia Chain Drugstore Co. Ltd. ("JZJ") to Nepstar. As of December 31, 2008 JZJ had 355 drugstore outlets, all of which were located in Yunnan province. As a result, Nepstar no longer consolidated JZJ's financials beginning in the first quarter of 2009, and the financial results of JZJ were accounted for under the equity method. To facilitate comparability of figures between periods presented, certain financial information for 2008 is shown on an adjusted basis in this press release to reflect the accounting impact of the termination of the voting rights agreement as if it had been taken place in the beginning of the relevant period.

SOURCE China Nepstar Chain Drugstore Ltd.
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