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China Nepstar Chain Drugstore Reports 92.1% Year-on-Year Increase in Operating Income for Third Quarter 2009
Date:12/1/2009

SHENZHEN, China, Dec. 1 /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 third quarter ended September 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 taken place in the beginning of the relevant period.

    For the quarter ended September 30, 2009:
    -- Revenue increased 8.0% to RMB556 million (US$81 million) compared to
       RMB515 million in the third quarter of 2008 on a pro forma basis
    -- Operating income rose 92.1% to RMB34 million (US$5 million) compared to
       RMB18 million in the third quarter of 2008 on a pro forma basis
    -- Net income was RMB37 million (US$5 million)
    -- Net cash flow from operations was RMB93 million (US$14 million)

"Our continuous efforts to improve store merchandise offerings and grow foot traffic have started to show encouraging results," commented Mr. Ian Wade, Chief Executive Officer of Nepstar. "As the Chinese economy continues to recover, we are encouraged by rising consumer spending in the healthcare sector. The value of our combination of quality products, reliable service and maximum convenience is becoming more and more recognized by community residents."

Third Quarter Results

During the third quarter of 2009, the Company opened 47 new stores and closed 22 stores. As of September 30, 2009, Nepstar had a total of 2,337 stores in operation.

Revenue for the third quarter of 2009 was RMB556 million (US$81 million), compared to RMB613 million for the same period in 2008, and RMB515 million for same period in 2008 on a pro forma basis.

For the third quarter of 2009 revenue contribution from prescription drugs was 22.0%, from over-the-counter ("OTC") drugs was 36.7%, from nutritional

supplements was 21.6%, from traditional Chinese herbal products was 3.4% and from other products was 16.3%.

Same store sales (for the 1,589 stores opened before December 31, 2007) for the third quarter of 2009 increased by 3.8% from the same period in 2008. The increase was mainly due to streamlining of operations and further optimization of product mix and recovery of the overall Chinese economy.

Nepstar's portfolio of private label products included 1,499 products as of September 30, 2009. Sales of private label products represented approximately 30.1% of revenue and 44.4% of gross profit for the third quarter of 2009.

For the third quarter of 2009, gross profit was RMB276 million (US$40 million), compared to RMB298 million for the same period in 2008 and RMB267 million for the same period in 2008 on a pro forma basis. Gross margin for the third quarter of 2009 was 49.6% compared to 48.6% for the same period in 2008 and 51.8% for the same period in 2008 on a pro forma basis. The decrease in gross margin for the third quarter of 2009 compared with the same period in 2008 on a pro forma basis was mainly due to expansion of the breadth of product offerings and price ranges to maintain competitiveness and address evolving consumer consumption patterns.

Sales, marketing and other operating expenses as a percentage of revenue for the third quarter of 2009 decreased to 38.4% compared to 41.1% for the same period in 2008 and 43.4% for the same period in 2008 on a pro forma basis. This decrease was primarily due to implementation of effective cost control measures, which resulted in a reduction in headcount and a reduction in rental expenses. The decrease was also due to the closing of non-performing stores.

General and administrative expenses as a percentage of revenue for the third quarter of 2009 were 5.1% compared to 4.4% 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 increased labor costs associated with the recruitment of additional middle and senior management.

As a result of previously mentioned factors, operating income for the third quarter of 2009 increased to RMB34 million (US$5 million) compared to RMB19 million for the same period in 2008 and RMB18 million for the same period in 2008 on a pro forma basis. Operating margin improved to 6.1% for the third quarter of 2009, from 3.4% for the third quarter of 2008 on pro forma basis, and subsequently improved from 4.1% for the second quarter of 2009.

Interest income for the third quarter of 2009 was RMB17 million (US$2 million) compared to RMB30 million for the same period in 2008 on a pro forma basis. The decrease in interest income was primarily due to (i) the maturity of a majority of the held-to-maturity investment securities of which the proceeds were placed in bank deposits; (ii) a general decrease of interest rates for bank deposits; and (iii) lower cash balances as a result of the dividend payment of approximately RMB248 million in May 2009.

Nepstar's effective tax rate was 28.4% for third quarter of 2009, compared to 26.7% for the same period in 2008 on pro forma basis. 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 third quarter of 2009 was RMB37 million (US$5 million), which represented RMB0.18 (US$0.03) basic and diluted earnings per ordinary share and RMB0.35 (US$0.05) basic and diluted earnings per American depositary share ("ADS"). This compares to net income of RMB36 million, which represented RMB0.17 basic and RMB0.16 diluted earnings per ordinary share and RMB0.34 basic and RMB0.32 diluted earnings per ADS for the same period in 2008. The total number of outstanding ordinary shares of the Company as of September 30, 2009 was 210 million. The weighted average number of ADSs for the third quarter of 2009 was 105 million. Each ADS represents two ordinary shares of the Company.

As of September 30, 2009, Nepstar's total cash, cash equivalents and current bank deposits were RMB1,807 million (US$265 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 RMB1,735 million (US$254 million).

Mr. William Dai, the Chief Financial Officer of Nepstar, stated, "We continue to exercise financial discipline on cost control and cash flow management. Our ability to consistently generate strong free cash flow demonstrates that our financial health strengthened throughout the economic recovery, and paves the way for the further expansion of our store network in 2010."

On August 24, 2009, Nepstar declared a special dividend of US$1.50 per ADS, or approximately US$156 million. Around December 1, 2009, the special cash dividend was paid out to shareholders of record as of the close of business on September 25, 2009.

Latest Developments and Business Outlook

In July 2009, Nepstar entered into a definitive agreement with Beijing Ze Run Tang Drugstore, to acquire its five drugstores in Beijing. This acquisition represents Nepstar's first retail presence in Beijing. The five stores have an average store size of 170 square meters, and are located in densely populated residential areas in Beijing. The acquisition was completed and the stores have been transferred to Nepstar by end of November and are serviced by the Company's regional logistics center in Tianjin, where Nepstar has over 100 stores.

In October 2009, Nepstar entered into a definitive agreement with Wenzhou Ren Ren Hao Chain Drugstore Ltd. ("Ren Ren Hao") to acquire the operations of all of its eight drugstores in Wenzhou City. This acquisition represents China Nepstar's first retail presence in Wenzhou, one of the most affluent markets in Zhejiang province in terms of consumption power. The eight Ren Ren Hao drugstores have an average store size of 250 square meters and are located in the city center or in prime locations in nearby major townships. The transaction is expected to be completed by the end of 2009.

In November 2009, Nepstar entered into a strategic cooperation agreement with ATMU (China) Technology Co., Ltd., a subsidiary of ATMU Inc., one of the largest ATM operators in China, to install ATMs in Nepstar stores. This cooperation is not only designed to provide convenience to customers and generate rental revenue for Nepstar, but will also help increase store traffic and accelerate the development of electronic payment services at Nepstar stores. ATMU plans to complete the initial 1,000 ATM installations in Nepstar's existing stores by end of 2010.

Mr. Wade commented, "Our strategy to increase overall revenues includes opening additional stores in selective areas of China, where economic trends are more favorable; establishing presence in lucrative markets through acquisitions; improving product mix; and increasing marketing and co-marketing programs to grow foot traffic. We are delighted to see our efforts to strengthen our product selection and broaden our price range result in positive same store sales growth and increased store traffic, which has continued into October and November."

Mr. Wade continued, "In general, we remain cautiously optimistic about the economic recovery and are pleased to see some positive elements coming together. The Chinese government's implementation of the Essential Drug List has had an adverse effect on many smaller drugstore chains. However, we at Nepstar view healthcare reform as a strategic opportunity to leverage our large retail network. We are also more optimistic on the outlook for acquisitions, as we expect more smaller-sized competitors may look to exit the sector due to increasing margin erosion on Essential Drug List products which may lead to their worsened financial conditions."

Conference Call Information

The Company will host a conference call, to be simultaneously Web cast, on Tuesday, December 1, 2009 at 8:30 a.m. Eastern Standard Time / 9:30 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 through December 11, 2009 at 11:59 p.m. Eastern Standard Time or December 12, 2009 at 12:59 p.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 337391.

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 September 30, 2009, the Company had 2,337 stores across 67 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 certified exchange rate of US$1.00 = RMB6.8262 on September 30, 2009 as set forth in the H.10 weekly statistical release of the Federal Reserve Board. No representation is made that the RMB amounts could have been, or could be, converted into US$ at that rate on September 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
     Phone: +1-646-284-9403
     Email: dixon.chen@us.grayling.com

     Ivette Almeida
     Grayling
     Media Relations
     Phone: +1-646-284-9455
     Email: ivette.almeida@us.grayling.com


                                    Tables follow



                       China Nepstar Chain Drugstore Ltd.
            Unaudited Condensed Consolidated Statements of Operations
            (amounts in thousands - except share and per-share data)

                                               Three-month period ended
                                                     September 30,
                                           2008           2009         2009
                                            RMB            RMB          USD

    Revenue                               612,981        556,179      81,477
    Cost of goods sold                   (315,191)      (280,240)    (41,053)
    Gross profit                          297,790        275,939      40,424

    Sales, marketing and other
     operating expenses                  (251,758)      (213,642)    (31,297)
    General and administrative
     expenses                             (26,779)       (28,231)     (4,137)
    Income from operations                 19,253         34,066       4,990

    Interest Income                        30,149         16,672       2,443
    Dividend income from cost method
     investments                              150             --          --
    Equity in income of an affiliate           --            789         116
    Earnings before income tax
     expense                               49,552         51,527       7,549

    Income tax expense                    (13,394)       (14,637)     (2,145)
    Net Income                             36,158         36,890       5,404

    Net Income attributable to
    non-controlling interests                (505)            --          --

    Net income attributable to China
    Nepstar Chain Drugstore Ltd.
     shareholders                          35,653         36,890       5,404

    Basic earnings per ordinary share        0.17           0.18        0.03
    Diluted earnings per ordinary share      0.16           0.18        0.03
    Diluted earnings per ADS                 0.32           0.35        0.05



                        China Nepstar Chain Drugstore Ltd.
                 Unaudited Condensed Consolidated Balance Sheets
                              (amounts in thousands)

                                     As of                    As of
                                  December 31,             September 30,
                                     2008                      2009
                                      RMB               RMB            USD
    ASSETS
    Current assets
    Cash, cash equivalents and
     other bank deposits           1,197,884         1,806,693       264,670
    Held-to-maturity
     investment securities           641,000           400,000        58,598
    Accounts receivable, net
     of allowance for doubtful
     accounts                         88,136            65,849         9,647
    Prepayments for purchase
     of merchandise paid to
     related parties                  70,306            45,728         6,699
    Amounts due from
     related parties                   7,244             8,162         1,196
    Prepaid expenses, deposits
     and other current assets        178,354           128,384        18,808
    Inventories                      373,689           301,131        44,113
    Deferred income taxes             15,863             7,540         1,104
    Total current assets           2,572,476         2,763,487       404,835

    Non-current assets
    Long-term bank deposits          200,000           200,000        29,299
    Held-to-maturity
     investment securities           400,000                --            --
    Property and equipment, net      240,396           198,721        29,112
    Deposits for purchases of
     properties paid to
     related parties                   2,100                --            --
    Rental deposits                   28,873            35,996         5,273
    Cost method equity
     investments                      12,638            12,638         1,851
    Equity method investments             --            18,005         2,638
    Intangible assets, net             2,390             1,134           166
    Goodwill                          35,177            36,603         5,362
    Deferred income taxes              4,723             4,211           617
    Other non-current assets              --            10,816         1,585
    Total non-current asset          926,297           518,124        75,903

    Total Assets                   3,498,773         3,281,611       480,738

    LIABILITIES AND SHAREHOLDERS'
     EQUITY
    Current liabilities
    Accounts payable                 267,250           273,506        40,067
    Amounts due to related
     parties                          64,200            12,523         1,835
    Accrued expenses and
     other payables                  123,905           126,209        18,489
    Income tax payable                35,344            31,364         4,594
    Dividend payable                      --         1,072,834       157,164
    Total current liabilities        490,699         1,516,436       222,149

    Non-current liabilities
    Deferred income                   14,992            19,568         2,867
    Deferred income taxes             10,443            11,047         1,618
    Total non-current
     liabilities                      25,435            30,615         4,485

    Total liabilities                516,134         1,547,051       226,634

    Shareholders' equity
    Share capital                        165               166            24
    Additional paid-in
     capital                       2,823,668         1,603,563       234,913
    Accumulated other
     comprehensive loss              (38,009)          (36,928)       (5,409)
    Retained earnings                173,650           167,759        24,576
    Total China Nepstar
    Chain Drugstore Ltd.
     shareholders' equity          2,959,474         1,734,560       254,104

    Non-controlling
     interests                        23,165                --            --

    Total shareholders'
     equity                        2,982,639         1,734,560       254,104
    Total liabilities and
     shareholders' equity          3,498,773         3,281,611       480,738



                       CHINA NEPSTAR CHAIN DRUGSTORE LTD.
             Unaudited Condensed Consolidated Cash Flows Information
                             (amounts in thousands)

                                                Three-month period ended
                                                       September 30,
                                            2008                 2009
                                             RMB            RMB         USD
    Cash flows provided by
     operating activities                  59,160         93,375      13,679

    Cash flows provided by
     investing activities                  11,373        606,769      88,888

    Cash flows (used in)/
     provided by financing
     activities                           (72,161)         8,135       1,192



                       China Nepstar Chain Drugstore Ltd.
               Key Financials Presented with Pro forma Comparisons
                     (amounts in thousands - except ratios)

                                                   Three-month ended
                                                      September 30,
                                          Pro Forma 2008              2009
                                               RMB                     RMB

    Revenue                                  514,817                 556,179
    Gross profit                             266,860                 275,939
    Gross Margin                               51.8%                   49.6%
    Income from operations                    17,732                  34,066
    Operating Margin                            3.4%                    6.1%
    Net income attributable
     to ordinary shareholders                 35,653                  36,890
    Net Margin                                  6.9%                    6.6%


                                            Pro Forma
                                         As of December        As of September
                                            31, 2008               30, 2009
                                               RMB                    RMB
    Cash, cash equivalents
     and other bank deposits               1,190,873               1,806,693
    Total held-to-maturity
     investment securities                 1,041,000                 400,000
    Long-term bank deposits                  200,000                 200,000
    Total assets                           3,383,238               3,281,611
    Total liabilities                        423,764               1,547,051
    Total shareholders' equity             2,959,474               1,734,560

    Pro forma financial information is presented to show the accounting
    impact of the termination of the JZJ voting rights agreement as if that
    had taken place in the beginning of the relevant period.

SOURCE China Nepstar Chain Drugstore Ltd.


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SOURCE China Nepstar Chain Drugstore Ltd.
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