China Nepstar Chain Drugstore Reports Second Quarter 2010 Financial Results

Wednesday, August 11, 2010 Corporate News
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SHENZHEN, China, Aug. 11 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 quarter endedJune 30, 2010.

"Starting from May, we began to expand our product offerings byintroducing high turnover convenience merchandise such as beverages, healthfood, household consumables, personal care products and othernon-pharmaceutical items. Our aim is to transform Nepstar stores intoneighborhood drugstores with one-stop convenience for many day-to-day needs.The core of this strategic transition is to leverage on our large storenetwork and customer base in urban neighborhoods, expand our product offeringsinto high quality and competitively priced selections of general food,personal care products and household consumables, and to address the widerneeds of our customers for a healthy and convenient lifestyle," commented Mr.Jason Wu, Acting Chief Executive Officer of Nepstar. "While we wait for thePRC government's progressive healthcare reform policies to revitalize thehealthcare sector and the drugstore industry, we are adopting a highlyproactive approach to adjust our business strategy so as to withstand theshort term disruption. We believe that our established brand name, economy ofscale and strong financial position will help us gain market share throughthis challenging time for all the drug retailers."

Second Quarter Results

Revenue for the quarter ended June 30, 2010 increased by 5.8% to RMB565million (US$83 million) from RMB534 million for the same period in 2009.

Second quarter revenue contribution from prescription drugs was 19.9%,over-the-counter ("OTC") drugs was 37.7%, nutritional supplements was 19.9%,traditional Chinese herbal products was 4.1% and other products was 18.4%.

Despite constant price reduction pressure, same store sales (for 2,176stores opened before December 31, 2008) for the second quarter of 2010increased by 1.4% compared to the same period in 2009. The increase was mainlyattributable to effective marketing campaigns and the mature of the storesopened in 2008.

Nepstar's portfolio of private label products included 1,625 products asof June 30, 2010. Sales of private label products represented approximately29.2% of revenue and 41.4% of gross profit for the second quarter of 2010.

Second quarter gross profit was RMB283 million (US$42 million), comparedto RMB256 million for the same period in 2009. Gross margin for the secondquarter of 2010 was 50.1% compared to 48.0% for the same period in 2009 andthe first quarter of 2010. The increase in gross margin for the second quarterof 2010 was largely due to the optimization of product mix.

Sales, marketing and other operating expenses as a percentage of revenuefor the second quarter of 2010 increased to 42.7% compared to 38.6% for thesame period in 2009. This increase was primarily due to the opening of 156 newstores in the fourth quarter of 2009 and 173 new stores in the first half of2010, which resulted in an increase in associated operating expenses. Theincrease was also attributable to the minimum wage increase during the secondquarter in 12 cities in which we operate.

General and administrative expenses as a percentage of revenue for thesecond quarter of 2010 decreased to 5.1% from 5.3% for the same period in 2009.

On July 30 2010, the State Administration of Foreign Exchange imposed onfour subsidiaries of the company a one-time non-recurring penalty in theamount of RMB26 million (US$3.8 million) for the conversion of approximatelyUS$349 million net proceeds from the initial public offering into Renminbi inDecember 2007 and January 2008. The penalty was booked in second quarter of2010 as an expense item before loss from operations.

As a result, operating loss for the second quarter of 2010 with the SAFEpenalty included was RMB13 million (US$2 million) compared to an operatingincome of RMB22 million for the same period in 2009 and an operating loss ofRMB4 million in the first quarter of 2010.

Interest income for the second quarter of 2010 was RMB5 million (US$1million) compared to RMB20 million for the same period in 2009. Otherinvestment income (dividend income from cost method investments and equity inincome of an equity method investee) was RMB2 million (US$0.2 million),compared to other investment income of RMB1 million in same quarter of 2009.The decrease in interest income was mainly due to (i) the maturity of allheld-to-maturity investment securities which had been earning higher interestincome; and (ii) lower cash balances as a result of the dividend payments in2009 and the second quarter of 2010.

Nepstar's effective tax rate was -130.2% for the second quarter of 2010,compared to 29.2% for the same period in 2009. The drastic change in theeffective tax rate was primarily due to the RMB26 million non-deductible SAFEpenalty booked in the second quarter. Should such penalty be excluded fromNepstar's operating result, its effective tax rate for the second quarter of2010 would become 44.9%. Other factors which affected the effective tax rateinclude an increase in the deferred tax asset valuation allowance for thesecond quarter, and the increase in transitional tax rate from 20% in 2009 to22% in 2010 for our subsidiaries in Shenzhen.

Net loss for the second quarter of 2010 was RMB13 million (US$2 million).This compares to net income of RMB30 million for the same period in 2009. Thetotal number of outstanding ordinary shares of the Company as of June 30, 2010was 211 million. The weighted average number of ADSs for the second quarter of2010 was 105.5 million. One ADS represents two ordinary shares.

As of June 30, 2010, Nepstar's total cash, cash equivalents and currentbank deposits were RMB1,161 million (US$171 million) and total shareholders'equity was RMB1,577 million (US$233 million).

In the second quarter, net cash flow from operations was RMB39 million(US$6 million).

Operating Highlights

During the second quarter of 2010, the Company opened 69 new stores andclosed 46 stores. As of June 30, 2010, Nepstar had a total of 2,582 stores inoperation.

In May 2010, Nepstar started to expand its product offerings byintroducing high turnover convenience merchandise such as beverages, healthfood, household consumables, personal care products and other non-pharmaceutical items. The Company expects that the expansion of productofferings will not only meet consumers' growing demand for shoppingconvenience and increase Nepstar's revenue, but also help mitigate the near-term negative impact of ongoing healthcare reform and government policies,which have caused price reductions to pharmaceuticals that are on the nationalEssential Drug List and Reimbursement List.

On July 20, 2010, Nepstar announced the sale of a total of 50,000Shopper's Cards with a total face value of approximately RMB19 million.Beginning in May 2010, the Company rolled out the Nepstar Shopper's CardProgram nationwide. The Nepstar Shopper's Card is a prepaid card, bearing facevalues ranging from RMB300 to RMB3,000. Customers can use their NepstarShopper's Cards to purchase beverages, health food, household consumables andpersonal care products at Nepstar stores. Starting from July 1, for every RMB6of the face value of the Shopper's Card, card owner receives a bonus credit ofRMB1. Bonus credits can be used to purchase pharmaceutical and nutritionalproducts in Nepstar stores.

Business Outlook

Mr. Jason Wu commented, "We believe our strategic transition will not onlyhelp us improve the status quo of weak per store output and hence upgradestore profitability, but will also serve as a defensive mechanism to mitigatethe negative impact of government policies on drug prices."

"Industry data is projecting attractive potential growth rates for salesof household consumables, as inflation of food prices and urban expansioncontinues throughout China. We believe that our established store footprint,proven central procurement program, advanced computer inventory replenishmentsystems and well-developed logistics network will enable us to develop asuccessful non-pharmaceutical line of business and provide the maximum levelof convenience and value to our customers."

Conference Call Information

The Company will host a conference call, to be simultaneously webcast, onWednesday, August 11, 2010 at 8:00 a.m. Eastern Daylight Time / 8:00 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 starting on August 11, 2010, at11:00 a.m. Eastern Daylight Time or 11:00 p.m. Beijing Time through August 18,2010 at 11:59 p.m. Eastern Daylight Time or August 19, 2010 at 11:59 a.m.Beijing Time. An archived Web cast of the conference call will be available onthe Nepstar web site at http://www.nepstar.cn . Interested parties may accessthe replay by dialing +1-877-660-6853 (North America) or +1-201-612-7415(International) and entering account number 286 and conference ID number354038.

About China Nepstar Chain Drugstore Ltd.

China Nepstar Chain Drugstore Ltd. (NYSE:NPD - News) is China's largestretail drugstore chain based on the number of directly operated stores. As ofJune 30, 2010, the Company had 2,582 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$1.00 = RMB6.7815 on June 30,2010 as set forth in the H.10 weekly statistical release of the FederalReserve Board. No representation is made that the RMB amounts could have been,or could be, converted into US$ at that rate on June 30, 2010, or at any otherdate. The percentages stated are calculated based on RMB amounts.Financial Highlights for the quarter ended June 30, 2010: -- Revenue was RMB565 million (US$83 million), reflecting a 5.8% increase compared to a revenue of RMB534 million in the second quarter of 2009 -- Gross margin improved to 50.1%, from 48.0% in the second quarter of 2009 and the first quarter of 2010 -- Before charging the SAFE penalty of RMB26 million, operating profit was RMB13 million (US$2 million), compared to operating loss of RMB4 million in the first quarter of 2010 -- Net cash flow from operations was RMB39 million (US$6 million)

SOURCE China Nepstar Chain Drugstore Ltd.


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