China Nepstar Chain Drugstore Reports Net Income Growth of 88.4% for Second Quarter...

China Nepstar Chain Drugstore Reports Net Income Growth of 88.4% for Second
Quarter 2008

SHENZHEN, China, Aug. 27 /Xinhua-PRNewswire-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, 2008.
Financial Highlights

For the quarter ended June 30, 2008:
-- Revenue rose by 21.5% to RMB585 million (US$85 million) compared to the
same period in 2007
-- Gross margin reached to 48.3%, compared to 42.6% for the same period in
2007
-- Net income increased by 88.4% to RMB56 million (US$8 million) compared
to the same period in 2007

"In the second quarter of 2008, we continued to grow our store network,
revenue and net income in a challenging operating environment. We also
initiated a training program to increase the knowledge of our store staff
about nutritional products. We believe such training can enhance our
customers' overall shopping experience, and has the potential to increase
customers' average purchase value per store visit, build strong customer
loyalty and maximize repeat customer visits. We intend to expand the training
program to cover other non-pharmaceutical products," commented Mr. Jiannong
Qian, Chief Executive Officer of Nepstar.
Second Quarter Results
Revenue for the second quarter 2008 was RMB585 million (US$85 million),
representing an increase of 21.5% compared to RMB481 million for the same
period in 2007.
For the second quarter 2008, revenue contribution from prescription drugs
was 22.1%, over-the-counter, or OTC, drugs was 34.5%, nutritional supplements
was 20.0%, traditional Chinese herbal products was 2.9% and other products was
20.5%.
Same store sales (for stores opened before December 31, 2006) for the
second quarter of 2008 decreased by 1.3% from the second quarter in 2007. This
decrease was mainly due to the impact of a severe earthquake in May 2008 and
heavy rain storms in Southern China in June 2008. Same store sales were
calculated based on 1,405 stores opened as of December 31, 2006.
Gross profit in the second quarter 2008 was RMB283 million (US$41
million),
an increase of 38.0% from RMB205 million for the same period in 2007. Gross
margin for the second quarter of 2008 increased to 48.3% from 42.6% for the
same period in 2007. The increase in gross margin was driven largely by
changes in product mix, including increased contributions from private label
products and centrally procured merchandise. However, gross margin increased
only slightly from the first quarter to the second quarter of 2008, primarily
due to the higher inflation in China resulting in procurement costs,
particularly for regionally procured products.
Sales, marketing and other operating expenses as a percentage of revenue
for the second quarter of 2008 increased to 36.7% from 29.7% for the same
period in 2007, primarily due to increased salary and rental costs, which in
turn were primarily due to the overall higher inflation rate in China. The
high expense ratio was also partially due to an increase in the proportion of
newly opened stores in the Company's store base, which, compared to mature
stores, generally generate lower revenue but incur similar or higher rental
and labor costs. General and administrative expenses as a percentage of
revenue for the second quarter of 2008 increased to 4.3% compared to 4.1% for
the same period in 2007, primarily due to additional administrative and
compliance costs related to being a publicly listed company.
As the result of the above, operating income for second quarter of 2008
increased 1.7% to RMB43 million (US$6 million) compared to RMB42 million for
the same period in 2007.
The Company's effective tax rate was 20.2% for second quarter of 2008,
compared to the effective tax rate of 25.4% in the same period of 2007. This
was primarily due to a decrease in this quarter of the deferred tax asset
valuation allowance.
Net income in the second quarter of 2008 increased 88.4% to RMB56 million
(US$8 million), or RMB0.26(US$0.04) basic earnings per share, or
RMB0.52(US$0.08) basic earnings per American depositary share (ADS), and
RMB0.26(US$0.04) diluted earnings per share, or RMB0.52(US$0.08) diluted
earnings
per ADS. This compares to net income of RMB30 million, or RMB0.15 basic
earnings per share, and RMB0.15 diluted earnings per share for the same
quarter in 2007. The weighted average number of ordinary shares used to
calculate basic earnings per ordinary share for the second quarter of 2008
were 216 million. One ADS represents two ordinary shares.
As of June 30, 2008, the Company's total cash was RMB1,349 million (US$197
million), held-to-maturity investment securities in total were RMB1,215
million (US$177 million) and total shareholders' equity was RMB2,990 million
(US$436 million).
Operating Highlights
During the second quarter of 2008, the Company opened 244 new stores and
closed 10 stores. As of June 30, 2008, Nepstar had a total of 2,483 stores in
operation.
Nepstar's portfolio of private label products included 1,345 products as
of June 30, 2008. Sales of private label products represented approximately
23.0% of revenue and 35.2% of gross profit of the Company for the second
quarter of 2008.
In April 2008, China Nepstar was awarded "Best Drugstore Chain of 2007 in
China" by China Drugstore Magazine, a leading trade publication in the
Drugstore industry in China. China Drugstore Magazine has more than 100,000
industry subscribers and has ranked China's drugstore chains for the past
eight years.
In May 2008, the Company entered into two procurement agreements with two
related party pharmaceutical wholesalers, under which Nepstar agreed to make
an aggregate of RMB137 million prepayments, in exchange for 8% to 10% of
rebate of procurement value on more than 100 types of national branded
products procured from the two companies from June 2008 to December 2008.
RMB32 million worth of products has since been delivered to Nepstar pursuant
to these agreements.
In early August, the Company entered into a definitive acquisition
agreement with Qingdao Kangjie Chain Drugstore Co. Ltd. ("Kangjie") to acquire
all of Kangjie's 42 drugstores in Qingdao, Shangdong Province for an aggregate
cash consideration of RMB16.8 million (US$2.5 million). This acquisition will
bring the total number of China Nepstar drugstores in Qingdao to over 80 by
the end of August, when the transaction is expected to close. Kangjie Chain
Drugstore was the second largest drugstore chain in Qingdao based on the
number of directly operated drugstores in 2007 with sales revenue of
approximately RMB27 million in 2007. All of the 42 Kangjie stores are
designated national healthcare insurance reimbursement stores. Qingdao is one
of China's largest sea ports with a population of 7.6 million.
Business Outlook
For the third quarter of 2008, Nepstar's targeted revenue is expected to
be between approximately RMB550 million and RMB570 million. Targeted net
income is expected to be between approximately RMB34 million and RMB36
million.
This outlook is based on the assumption that approximately 100 new stores will
be added in the third quarter of 2008.
"2008 is a challenging year for the entire drugstore sector in China due
to higher operating costs resulted from an inflationary operating environment,
the occurrence of a number of natural disasters, including the severe
earthquake in May 2008 and heavy rain storms in Southern China in June 2008,
as well as the enforcement of the PRC regulation restricting drugstores from
selling products with steroid ingredients. We have decided to adjust our
growth strategy to devote additional resources to improving the productivity
of our existing stores," noted Dr. Simin Zhang, Chairman of Nepstar. "We are
confident that we can leverage our financial resources, economies of scale and
operational expertise to grow our business effectively. As a market leader in
the drugstore sector in China, we are presented with a great opportunity to
continue to pursue good acquisition targets with attractive valuations," Dr.
Zhang continued.
Based on its first six months performance and the Company's current views
with respect to operating and market conditions, which are subject to change,
the Company has adjusted its targeted revenue for fiscal 2008 to be in the
range between approximately RMB2.2 billion and RMB2.3 billion, and targeted
net income to be in the range between approximately RMB190 million and RMB210
million. Total new stores including organic new store openings and
acquisitions in 2008 are expected to be 650.
Conference Call Information
The Company will host a conference call, to be simultaneously Web cast, on
Wednesday, August 27, 2008 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 27, 2008, at
11:00 a.m. Eastern Daylight Time / 11:00 p.m. Beijing Time through September
3,
2008 at 11:59 p.m. Eastern Daylight Time or September 4, 2008 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
293267.
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,
2008, the Company had 2,483 stores across 73 cities, one headquarters
distribution center and 11 regional distribution centers in China. China
Nepstar uses directly operated stores, centralized procurement and a network
of distribution centers to provide customers with high-quality, professional
and convenient pharmacy services and a wide variety of other merchandise,
including over-the-counter ("OTC") drugs, nutritional supplements, herbal
products, personal care products, family care products, and convenience
products including consumables. China 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 27A of
the Securities Act of 1933, as amended, and 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, the
Company's strategic operational plans, as well as outlook for the second
quarter of 2008, 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$1.00 = RMB6.8591 on June 30, 2008 in
The City of New York for the cable transfers of RMB as certified for customs
purposes by the Federal Reserve Bank of New York. No representation is made
that the RMB amounts could have been, or could be, converted into US$ at that
rate on June 30, 2008, or at any other certain date. The percentages stated
are calculated based on RMB.

China Nepstar Chain Drugstore Ltd.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2007 AND AS OF JUNE 30, 2008
(Amounts in thousands, except share data)

As of As of As of
December 31, June 30, June 30,
2007 2008 2008
RMB RMB USD
ASSETS
Current assets:
Cash 2,168,911 1,349,325 196,720
Held-to-maturity investment securities 600,000 815,000 118,820
Accounts receivable, net of allowance
for doubtful accounts 54,753 69,001 10,060
Prepayments for purchase of merchandise
paid to related parties 4,452 126,971 18,511
Amounts due from related parties 1,408 3,200 467
Prepaid expenses, deposits and other
current assets 107,229 173,034 25,227
Inventories 285,307 326,164 47,552
Deferred income taxes 2,991 2,079 303

Total current assets 3,225,051 2,864,774 417,660
Held-to-maturity investment securities -- 400,000 58,317
Property and equipment, net 172,171 214,947 31,337
Deposits for purchases of properties
paid to related parties 2,125 2,100 306
Rental deposits 22,167 24,589 3,585
Equity investments 12,638 12,638 1,842
Intangible assets, net 3,135 2,376 347
Goodwill -- 12,089 1,763
Deferred income taxes 1,254 14,586 2,127

TOTAL ASSETS 3,438,541 3,548,099 517,284

LIABILITIES, MINORITY INTERESTS AND
SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable 233,425 232,701 33,926
Amounts due to related parties 50,544 65,570 9,560
Accrued expenses and other payables 142,505 140,575 20,494
Income tax payable 37,958 48,361 7,051
Dividend payable -- 27,904 4,068

Total current liabilities 464,432 515,111 75,099
Deferred income -- 15,910 2,320
Deferred income taxes -- 5,415 789

Total liabilities 464,432 536,436 78,208

Minority interests 18,964 21,764 3,173

Shareholders' equity

Share capital - ordinary shares USD
0.0001 par value:
240,000,000 shares authorized;
213,077,944 shares issued and
outstanding as of December 31,
2007; 216,123,400 shares
issued and outstanding as of
June 30, 2008 168 170 25
Additional paid-in capital 2,921,521 2,936,703 428,147
Accumulated other comprehensive loss (37,957) (38,837) (5,662)
Retained earnings 71,413 91,863 13,393

Total shareholders' equity 2,955,145 2,989,899 435,903

Commitments and contingencies

TOTAL LIABILITIES, MINORITY INTERESTS
AND SHAREHOLDERS' EQUITY 3,438,541 3,548,099 517,284

China Nepstar Chain Drugstore Ltd.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH PERIODS ENDED JUNE 30, 2007 AND 2008
(Amounts in thousands, except per share data)
Three-month period ended June 30,
2007 2008 2008
RMB RMB USD

Revenue 481,421 585,146 85,309
Cost of goods sold (276,382) (302,274) (44,069)

Gross profit 205,039 282,872 41,240
Sales, marketing and other
operating expenses (143,130) (214,623) (31,290)
General and administrative
expenses (19,823) (25,441) (3,709)

Income from operations 42,086 42,808 6,241

Interest income 262 29,358 4,280
Interest expense (49) -- --
Dividend income from cost method 212 150 22
investments -- 113 16
Gain on disposal of a subsidiary

Income before income tax expense
and minority interests 42,511 72,429 10,559
Income tax expense (10,786) (14,639) (2,134)

Income before minority interests 31,725 57,790 8,425
Minority interests (1,977) (1,731) (252)

Net income 29,748 56,059 8,173

Accretion to Series A redeemable
convertible preferred shares
redemption value (4,332) -- --

Net income attributable
to ordinary shareholders 25,416 56,059 8,173

Net income per ordinary share:

Basic 0.15 0.26 0.04

Diluted 0.15 0.26 0.04

China Nepstar Chain Drugstore Ltd.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE-MONTH PERIODS ENDED JUNE 30, 2007 AND 2008
(Amounts in thousands)

Three-month period ended June 30,
2007 2008 2008
RMB RMB USD

Net cash provided by/(used in)
operating activities 22,217 (105,143) (15,329)
Net cash (used in)/provided by
investing activities (12,395) 164,069 23,920
Net cash used in financing
activities (967) (47,963) (6,993)

For more information, please contact:

In China:
Lucia Qian
China Nepstar Chain Drugstore Ltd.
Marketing and IR Director
Tel: +86-755-2641-4065
Email: qianrt@nepstar.cn

In the United States:
Dixon Chen
Grayling Global
Investor Relations
Tel: +1-646-284-9403
Email: dchen@hfgcg.com

Ivette Almeida
Grayling Global
Media Relations
Tel: +1-646-284-9455
Email: ialmeida@hfgcg.com

SOURCE China Nepstar Chain Drugstore Ltd.

In China, Lucia Qian, Marketing and IR Director, China Nepstar Chain Drugstore
Ltd., +86-755-2641-4065, or qianrt@nepstar.cn; In the United States, Dixon
Chen, Investor Relations, Grayling Global, +1-646-284-9403, or
dchen@hfgcg.com; Ivette Almeida, Media Relations, Grayling Global, +1-646-284-
9455, or ialmeida@hfgcg.com, all for China Nepstar Chain Drugstore Ltd.