omniture

China Nepstar Chain Drugstore Reports Second Quarter 2009 Financial Results

- Improved Operating Margin and Continued Cash Generation -

SHENZHEN, China, Aug. 24 /PRNewswire-Asia-FirstCall/ -- China Nepstar Chain Drugstore Ltd. (NYSE: NPD) ("Nepstar" or "the Company"), the largest retail drugstore chain in China based on the number of directly operated stores, today announced its unaudited financial results for the quarter ended June 30, 2009.

Financial Highlights

In January 2009, Nepstar terminated a voting rights assignment 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 located in the 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, pro forma financial information is presented to show the accounting impact of the termination of the voting rights assignment agreement as if that had been taken place in the beginning of the relevant period.

For the quarter ended June 30, 2009:

-- Revenue was RMB534 million (US$78 million) reflecting a 7.5% increase

compared to revenue of RMB497 million in the second quarter of 2008 on

a pro forma basis

-- Operating margin improved to 4.1%, compared to 2.6% for the first

quarter of 2009

-- Net income was RMB30 million (US$4 million)

-- Net cash flow from operations was RMB78 million (US$11 million)

"We remain focused on balancing revenue growth and margin improvement as this is our theme of this rather challenging year 2009," commented Mr. Ian Wade, Chief Executive Officer of Nepstar. "Our efforts to adjust product mix and pricing to reflect the changing needs of customers in this environment have enabled us to minimize adverse effects on overall store performance."

Second Quarter Results

During the second quarter of 2009, the Company opened 19 new stores and closed 43 stores. As of June 30, 2009, Nepstar had a total of 2,312 stores in operation.

Revenue for the quarter ended June 30, 2009 was RMB534 million (US$78 million), compared to revenue of RMB585 million for the same period in 2008, and revenue of RMB497 million for same period in 2008 on a pro forma basis.

Second quarter revenue contribution from prescription drugs was 21.3%, over-the-counter ("OTC") drugs was 36.9%, nutritional supplements was 20.8%, traditional Chinese herbal products was 3.7% and other products was 17.3%.

Same store sales (for the 1,608 stores opened before December 31, 2007) for the second quarter of 2009 decreased by 1.3% from the same period in 2008. The decline was mainly due to the decline in the general economic environment in Guangdong Province and certain cities in the Yangtze River Delta, where many export oriented businesses have suffered from a drop of global demand due to the economic recession in many key economies around the world. Of the 1,608 stores opened before December 31, 2007, over 1,100 stores are located in Guangdong Province and Yangtze River Delta.

Nepstar's portfolio of private label products included 1,487 products as of June 30, 2009. Sales of private label products represented approximately 28.7% of revenue and 42.5% of gross profit for the second quarter of 2009.

Second quarter gross profit was RMB256 million (US$38 million), compared to RMB283 million for the same period in 2008 and RMB254 million for the same period in 2008 on a pro forma basis. Gross margin for the second quarter of 2009 was 48.0% compared to 48.3% for the same period in 2008 and 51.1% for the same period in 2008 on a pro forma basis. The decrease in gross margin for the second quarter of 2009 compared with pro forma results was largely due to price adjustments of certain price sensitive products to maintain competitiveness and address the changing consumer consumption pattern as a result of worsened economic environment.

Sales, marketing and other operating expenses as a percentage of revenue for the second quarter of 2009 increased to 38.6% compared to 36.7% for the same period in 2008 and 38.1% for the same period in 2008 on a pro forma basis. This increase was primarily due to an increase in the proportion of newly opened stores in Nepstar's store base. Nepstar also incurred costs of RMB2 million associated with store closures in the second quarter of 2009. This increase was partially offset by a decrease in sales, marketing and other operating expenses, which dropped for the third consecutive quarter in absolute terms since the fourth quarter of 2008, due to effective cost control measures, particularly in head-count reduction and renegotiation of rental terms.

General and administrative expenses as a percentage of revenue for the second quarter of 2009 were 5.3% compared to 4.3% for the same period in 2008 and 5.0% for the same period in 2008 on a pro forma basis. This increase compared to the same period in 2008 on a pro forma basis was primarily due to additional administrative and compliance costs related to being a publicly listed company as well as higher labor cost associated with new recruits in management team.

As a result of previously mentioned factors, operating income for the second quarter of 2009 was RMB22 million (US$3 million) compared to RMB43 million for the same period in 2008 and RMB40 million for the same period in 2008 on a pro forma basis. However, operating margin increased from 2.6% in the first quarter of 2009 to 4.1% in the second quarter.

Interest income for the second quarter of 2009 was RMB20 million (US$3 million) compared to RMB29 million for the same period in 2008 on a pro forma basis and RMB24 million for the first quarter of 2009. The decrease in interest income was primarily due to (i) the conversion of a majority of the held-to-maturity investment securities into bank deposits at the maturity date; (ii) a general decrease of interest rates for bank deposits; and (iii) lower cash balances as a result of dividend payment of approximately RMB248 million in May 2009.

Nepstar's effective tax rate was 29.2% for second quarter of 2009, compared to 20.2% for the same period in 2008. The increase in effective tax rate was primarily due to relatively higher portion of Nepstar's taxable profits being generated by subsidiaries subject to the PRC statutory tax rate, rather than the preferential rate.

Net income for the second quarter of 2009 was RMB30 million (US$4 million), which represented RMB0.30 (US$0.04) basic earnings per American depositary share ("ADS"), and RMB0.28 (US$0.04) diluted earnings per ADS. This compares to net income of RMB56 million, which represented RMB0.52 basic and diluted earnings per ADS for the same period in 2008. The total number of outstanding ordinary shares of the Company as of June 30, 2009 was 208 million. The weighted average number of ADSs for the second quarter of 2009 was 105 million. Each ADS represents two ordinary shares of the Company.

As of June 30, 2009, Nepstar's total cash, cash equivalents and current bank deposits were RMB1,723 million (US$252 million), long term bank deposits were RMB200 million (US$29 million), held-to-maturity investment securities were RMB400 million (US$59 million) and total shareholders' equity was RMB2,761 million (US$404 million).

On March 16, 2009 Nepstar declared a cash dividend of US$0.35 per ADS, or approximately RMB250 million. The dividend was distributed in May 2009.

Latest Developments and Business Outlook

Nepstar started to open stores in Hubei Province and Jilin Province, two new markets in central China and Northeast China respectively, in the third quarter. The Company is carefully monitoring the local consumers' reflection and is actively fine-tuning product offerings for those stores in new markets.

In July, Nepstar entered into a definitive agreement with Beijing Run Ze Tang Drugstore, to acquire its five drugstores in Beijing. This acquisition represents Nepstar's first retail presence in Beijing. The five stores being acquired have an average store size of 170 square meters, and are located in densely populated residential areas in Beijing. The stores will be serviced by the Company's regional logistics center in Tianjin, where Nepstar has over 100 stores.

Mr. Wade commented, "Our strategy to increase overall revenues includes opening additional stores in selective areas of China, where economic trends are more favorable, such as northern, western and central China. We are particularly pleased to have taken our first step in Beijing, which we believe is a very promising market. We will continue to open new stores by ourselves as well as seek synergetic acquisition targets in both existing and new markets.

"On the operational side, we have been hiring new mid-level management as well as reformulating the existing team. In particular, we have just completed the restructuring of our merchandise planning and procurement function, which is the heart of any retail business. We believe our effort to bring together a stronger and more cohesive team will be reflected in our financial performances as they are absorbed and their contribution accelerates.

"In general, we are cautiously optimistic about the economic recovery and are pleased to see some positive elements coming together."

Conference Call Information

The Company will host a conference call, to be simultaneously Web cast, on Monday, August 24, 2009 at 8:00 a.m. Eastern Daylight Time / 8:00 p.m. Beijing Time. Interested parties may participate in the conference call by dialing

+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 cast of the conference call will be available on the Nepstar Web site at http://www.nepstar.cn .

A replay of the call will be available starting on August 24, 2009, at 11:00 a.m. Eastern Daylight Time / 11:00 p.m. Beijing Time through September 3, 2009 at 11:59 p.m. Eastern Daylight Time or September 4, 2009 at 11:59 a.m. Beijing Time. An archived Web cast of the conference call will be available on the Nepstar Web site at http://www.nepstar.cn . Interested parties may access the replay by dialing +1-877-660-6853 (North America) or +1-201-612-7415 (International) and entering account number 286 and conference ID number 329377.

About China Nepstar Chain Drugstore Ltd.

China Nepstar Chain Drugstore Ltd. (NYSE: NPD) is China's largest retail drugstore chain based on the number of directly operated stores. As of June 30, 2009, the Company had 2,312 stores across 64 cities, one headquarter distribution center and 12 regional distribution centers in China. Nepstar uses directly operated stores, centralized procurement and a network of distribution centers to provide its customers with high-quality, professional and convenient pharmacy services and a wide variety of other merchandise, including OTC drugs, nutritional supplements, herbal products, personal care products, family care products, and convenience products including consumables. Nepstar's strategy of centralized procurement, competitive pricing, customer loyalty programs and private label offerings has enabled it to capitalize on the robust economic growth in China and to take advantage of the demographic trend in China to achieve a strong brand and leading market position. For further information, please go to http://www.nepstar.cn .

Safe Harbor Statement

This press release contains forward-looking statements. These statements constitute "forward-looking" statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as "will," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates" and similar statements. Among other things, the quotations from management in this press release and the Company's strategic operational plans and business outlook, contain forward-looking statements. Such statements involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Further information regarding these 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-looking statement as a result of new information, future events or otherwise, except as required under applicable law.

Exchange Rate Information

The United States dollar (US$) amounts disclosed in this press release are presented solely for the convenience of the reader. Translations of amounts from RMB into United States dollars for the convenience of the reader were calculated at the noon buying rate of US$1.00 = RMB6.8319 on June 30, 2009 in The City of New York for the cable transfers of RMB as certified for customs purposes by the Federal Reserve Bank of New York. No representation is made that the RMB amounts could have been, or could be, converted into US$ at that rate on June 30, 2009, or at any other certain date. The percentages stated are calculated based on RMB.

For more information, please contact:

In China:

Lucia Qian

China Nepstar Chain Drugstore Ltd.

Vice President, IR

Phone: +86-755-2641-4065

Email: qianrt@nepstar.cn

In the United States:

Dixon Chen

Grayling

Investor Relations

Tel: +1-646-284-9403

Email: dixon.chen@us.grayling.com

Ivette Almeida

Grayling

Media Relations

Tel: +1-646-284-9455

Email: ivette.almeida@us.grayling.com

Tables Follow

China Nepstar Chain Drugstore Ltd.

Condensed Consolidated Statements of Operations

(amounts in thousands - except share and per-share data)

Three-month period ended

June 30,

2008 2009 2009

RMB RMB USD

Revenue 585,146 534,119 78,200

Cost of goods sold (302,274) (277,698) (40,658)

Gross profit 282,872 256,421 37,542

Sales, marketing and other

operating expenses (214,623) (206,287) (30,202)

General and administrative

expenses (25,441) (28,461) (4,167)

Income from operations 42,808 21,673 3,173

Interest Income 29,358 19,962 2,923

Dividend income from cost method

investments 150 -- --

Equity in income of an affiliate -- 921 135

Gain on disposal of a subsidiary 113 -- --

Earnings before income tax expense 72,429 42,556 6,231

Income tax expense (14,639) (12,430) (1,820)

Net Income 57,790 30,126 4,411

Net Income attributable to

non-controlling interests (1,731) -- --

Net income attributable to

ordinary shareholders 56,059 30,126 4,411

Basic earnings per ordinary share 0.26 0.15 0.02

Diluted earnings per ordinary share 0.26 0.14 0.02

China Nepstar Chain Drugstore Ltd.

Condensed Consolidated Balance Sheets

(amounts in thousands)

As of As of

December 31, June 30,

2008 2009

RMB RMB USD

ASSETS

Current assets

Cash, cash equivalents and

other bank deposits 1,197,884 1,723,438 252,326

Held-to-maturity investment

securities 641,000 400,000 58,563

Accounts receivable, net of

allowance for doubtful

accounts 88,136 58,312 8,537

Prepayments for purchase of

merchandise paid to related

parties 70,306 60,285 8,826

Amounts due from related

parties 7,244 8,277 1,212

Prepaid expenses, deposits

and other current assets 178,354 134,590 19,706

Inventories 373,689 283,032 41,438

Deferred income taxes 15,863 6,635 971

Total current assets 2,572,476 2,674,569 391,579

Non-current assets

Long-term bank deposits 200,000 200,000 29,282

Held-to-maturity investment

securities 400,000 -- --

Property and equipment, net 240,396 199,686 29,236

Deposits for purchases of

properties paid to related

parties 2,100 -- --

Rental deposits 28,873 35,997 5,271

Cost method equity investments 12,638 12,638 1,850

Equity method investments -- 17,216 2,521

Intangible assets, net 2,390 1,553 227

Goodwill 35,177 35,177 5,150

Deferred income taxes 4,723 8,708 1,275

Total non-current asset 926,297 510,975 74,812

Total Assets 3,498,773 3,185,544 466,391

LIABILITIES AND

SHAREHOLDERS' EQUITY

Current liabilities

Accounts payable 267,250 256,919 37,615

Amounts due to related

parties 64,200 13,433 1,967

Accrued expenses and other

payables 123,905 99,489 14,566

Income tax payable 35,344 26,196 3,835

Dividend payable -- 245 36

Total current liabilities 490,699 396,282 58,019

Non-current liabilities

Deferred income 14,992 19,583 2,867

Deferred income taxes 10,443 8,568 1,255

Total non-current liabilities 25,435 28,151 4,122

Total liabilities 516,134 424,433 62,141

Shareholders' equity

Share capital 165 164 24

Additional paid-in capital 2,823,668 2,667,725 390,577

Accumulated other

comprehensive loss (38,009) (37,648) (5,512)

Retained earnings 173,650 130,870 19,161

Total China Nepstar Chain

Drugstore Ltd. shareholders'

equity 2,959,474 2,761,111 404,250

Non-controlling interests 23,165 -- --

Total shareholders' equity 2,982,639 2,761,111 404,250

Commitments and Contingencies -- -- --

Total liabilities and

shareholders' equity 3,498,773 3,185,544 466,391

CHINA NEPSTAR CHAIN DRUGSTORE LTD.

Condensed Consolidated Statements of Cash Flows

(amounts in thousands)

Three-month period ended

June 30,

2008 2009

RMB RMB USD

Cash flows (used in)/provided by

operating activities (105,143) 77,673 11,372

Cash flows provided by investing

activities 164,069 16,148 2,364

Cash flows used in financing

activities (47,963) (244,332) (35,772)

China Nepstar Chain Drugstore Ltd.

Key Financials Presented with Pro forma Comparisons

(amounts in thousands - except ratios)

Three-month period ended

June 30,

Pro Forma 2008 2009

RMB RMB

Revenue 496,726 534,119

Gross profit 253,806 256,421

Gross Margin 51.1% 48.0%

Income from operations 39,840 21,673

Operating Margin 8.0% 4.1%

Net income attributable

to ordinary shareholders 56,059 30,126

Net Margin 11.3% 5.6%

Pro Forma

As of As of

December 31, 2008 June 30, 2009

RMB RMB

Cash, cash equivalents

and other bank deposits 1,190,873 1,723,438

Total held-to-maturity

investment securities 1,041,000 400,000

Long-term bank deposits 200,000 200,000

Total assets 3,383,238 3,185,544

Total liabilities 423,764 424,433

Total shareholders' equity 2,959,474 2,761,111

Pro forma financial information is presented to show the accounting

impact of the termination of the voting rights agreement as if that had

been taken place in the beginning of the relevant period.

Source: China Nepstar Chain Drugstore Ltd.
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