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China Nepstar Chain Drugstore Reports First Quarter 2009 Financial Results

SHENZHEN, China, May 27 /PRNewswire-Asia-FirstCall/ -- China Nepstar Chain Drugstore Ltd. (NYSE: NPD) ("Nepstar" or "the Company"), the largest drugstore chain in China based on the number of directly operated stores, today announced its unaudited financial results for the first quarter ended March 31, 2009.

Financial Highlights

In January 2009, Nepstar's board of directors approved the termination of 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 of which were located in Yunnan province in southwestern China. As a result of the termination of the voting rights assignment agreement, Nepstar no longer consolidated JZJ's financials beginning in the first quarter of 2009, and the financial results of JZJ was 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 March 31, 2009:

    -- Revenue was RMB506 million (US$74 million), reflecting a 12.1% increase
       compared to revenue of RMB 451 million in the first quarter of 2008 on
       pro forma basis
    -- Net income was RMB30 million (US$4 million)
    -- Net cash flow from operations was RMB93 million (US$14 million)

"As the global economic crisis continues to drive declines in export oriented businesses in southern China, many migrant workers have returned to their rural homes, which has significantly shifted consumption trends," commented Mr Ian Wade, Co-Chief Executive Officer of Nepstar. "Nepstar is actively aligning itself with this change by closing down poorly performing stores in southern regions and focusing our efforts on driving sales in northern regions by improving store efficiencies. As a result, we have been able to minimize the adverse impact on our overall same store sales, and increased first quarter revenues by 12.1% compared to revenue in the first quarter of 2008 on a pro forma basis. We will continue to control costs, improve operating efficiencies and pursue competitive strategies to leverage our brand strength and network scale."

First Quarter Results

Revenue for the quarter ended March 31, 2009 was RMB506 million (US$74 million), compared to RMB543 million for the first quarter of 2008, and was 12.1% higher than revenue of RMB451 million for the first quarter of 2008 on a pro forma basis.

First quarter revenue contribution from prescription drugs was 22.1%, over-the-counter ("OTC") drugs was 37.9%, nutritional supplements was 20.1%, traditional Chinese herbal products was 4.2% and other products was 15.7%. Same store sales (for stores opened before December 31, 2007) for the first quarter of 2009 decreased by 1.9% from the same period last year. The decline was mainly due to the worsened economic environment in southern China, where many export oriented businesses have suffered from collapsing global demand. Same store sales were calculated based on 1,630 stores opened as of December 31, 2007.

Nepstar's portfolio of private label products included 1,451 products as of March 31, 2009. Sales of private label products represented approximately 28.5% of revenue and 42.7% of gross profit for the first quarter 2009.

Gross profit was RMB244 million (US$36 million) for the first quarter of 2009, as compared to RMB259 million for the first quarter of 2008 and RMB229 million on a pro forma basis. Gross margin for the quarter of 2009 was 48.2%, as compared to 47.7% for the same period in 2008 and 50.7% on pro forma basis. The decrease in gross margin compared with that of pro forma basis was largely due to the price adjustments of certain price sensitive products to maintain competitiveness and to 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 first quarter of 2009 increased to 41.0% compared to 35.8% in the first quarter of 2008 and 38.3% on a pro forma basis. The increase was primarily due to an increase in the proportion of newly opened stores in the Company's store base. Also, we incurred costs of RMB1.4 million associated with store closures in the first quarter of 2009. However, sales, marketing and other operating expenses dropped for the second consecutive quarter in absolute amount since the fourth quarter 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 first quarter of 2009 was 4.6% compared to 4.4% for the first quarter of 2008 and 5.0% on a pro forma basis. The decrease compared to pro forma basis was also primarily due to efficient cost control measures.

Operating income for the first quarter of 2009 was RMB13 million (US$2 million) compared to RMB41 million for the first quarter of 2008 and RMB34 million on a pro forma basis.

The Company's effective tax rate was 26.5% for first quarter of 2009, compared to 24.5% for the first quarter of 2008. The increase in effective tax rate was primarily due to (i) higher tax rates that certain of the Company's subsidiaries are subject to under the new PRC corporate income tax law, and (ii) an increase in the deferred tax asset valuation allowance for tax loss carry forwards, the benefits of which the Company currently does not expect to be realizable.

Net income in the first quarter 2009 was RMB30 million (US$4 million), or 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 RMB55 million, or RMB0.52 basic and RMB0.50 diluted earnings per ADS for the first quarter of 2008. The total number of outstanding ordinary shares for the Company as of March 31, 2009 was 207 million. The weighted average number of ADSs for the first quarter of 2009 was 104 million. One ADS represents two ordinary shares.

As of March 31, 2009, the Company's total cash, cash equivalents and current bank deposits were RMB1,874 million (US$274 million), long term bank deposits were RMB200 million (US$ 29 million), held-to-maturity investment securities were RMB408 million (US$ 60 million) and total shareholders' equity was RMB2,727 million (US$ 399 million).

On March 16, the Company declared a cash dividend of US$0.35 per ADS, or approximately RMB250 million.

First Quarter Operating Highlights

During the first quarter of 2009, management focused on improving product offerings in both pharmaceutical and non-pharmaceutical sectors and enhancing the store operation standards. Meanwhile, in selective areas where business is seriously impacted by the worsened economic environment, aggressive pilot marketing programs were implemented starting from second half of March 2009 in an attempt to grow our market share and enhance our competitive position.

In first quarter of 2009, Nepstar opened 16 new stores organically and closed 34 stores. As of March 31, 2009, Nepstar had a total of 2,336 stores in operation. JZJ had 361 drugstores, in which Nepstar holds 40% equity interest. Since the second half of 2008, Nepstar shifted its strategy to focus on improving the overall quality of store performance by closing poorly performing stores, being more selective in acquiring new stores and slowing the pace of new store openings, which generally incur high initial costs, but generate lower revenues during their first two years of operations.

In the mean time, Nepstar has been in discussions with local governments in Hubei Province and Jilin Province to obtain support for Nepstar to develop those new markets. Once favorable terms are confirmed, Nepstar will consider entering into those new areas. Also in the first quarter of 2009, the Company is exploring business opportunities with catalogue sales, that is, customers could place orders and receive delivery at home according to Nepstar catalogues for products that are not carried at store level. Sixteen stores across China have been experimenting with catalogue sales of household consumables. We are carefully monitoring and adjusting the experimental model.

Business Outlook

Mr. Wade commented, "We are committed to preserving Nepstar's brand equity and expanding market share. Our strategy is to continue to drive same store sales, while reducing overall costs and leveraging our infrastructure to enhance efficiencies. We are reviewing all aspects of operations, including product mix and pricing to ensure the best and most competitive offerings for our customers.

"We remain hopeful that Chinese healthcare reform is poised to benefit the more than one billion people in China and achieve an overall higher quality of life. The Chinese government's recent stimulus and related healthcare subsidy should significantly expand healthcare spending, which will benefit all aspects of the industry, including the retail drugstore market. We believe the worst is already behind us and look forward to recovery in the balance of the year."

Conference Call Information

The Company's management team will host a conference call, to be simultaneously Web cast, on Wednesday, May 27, 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 .

A replay of the call will be available starting on May 27, 2009, at 11:00 a.m. Eastern Daylight Time / 11:00 p.m. Beijing Time through June 3, 2009 at 11:59 p.m. Eastern Daylight Time or June 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 . 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 323198.

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 March 31, 2009, the Company had 2,336 stores across 63 cities and 40% equity in the 361 stores of its affiliate in Yunnan province, 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 .

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 exchange rate of US$1.00 = RMB6.8329 on March 31, 2009 as set forth in the H. 10 statistical release of the Federal Reserve Board. No representation is made that the RMB amounts could have been, or could be, converted into US$ at that rate on March 31, 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.
     Marketing and IR Director
     Phone: +86-755-2641-4065

    In the United States:
     Dixon Chen
     Investor Relations
     Tel:   +1-646-284-9403

    Ivette Almeida
     Media Relations
     Tel:   +1-646-284-9455

    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
                                                       March 31,
                                              2008        2009        2009
                                               RMB         RMB         USD

    Revenue                                  542,738     505,960     74,047
    Cost of goods sold                      (283,477)   (261,970)   (38,339)
    Gross profit                             259,261     243,990     35,708

    Sales, marketing and other operating
     expenses                               (194,496)   (207,622)   (30,386)
    General and administrative expenses      (23,876)    (23,295)    (3,409)
    Income from operations                    40,889      13,073      1,913

    Interest income                           35,502      23,518      3,442
    Dividend income from cost method
     investments                                 816       3,776        553
    Equity in income of affiliates                --       1,007        147
    Earnings before income tax expense
     and minority interests                   77,207      41,374      6,055

    Income tax expense                       (18,945)    (10,944)    (1,602)
    Minority interests                        (3,362)         --         --

    Net income attributable to ordinary
     shareholders                             54,900      30,430      4,453

    Earnings per ordinary share:
    Basic                                       0.26        0.15       0.02
    Diluted                                     0.25        0.14       0.02

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

                                              As of
                                           December 31,     As of March 31,
                                              2008         2009        2009
                                               RMB          RMB         USD
    Current assets
    Cash, cash equivalents and other bank
     deposits                               1,197,884    1,874,005    274,262
    Held-to-maturity investment
     securities                               641,000        8,000      1,171
    Accounts receivable, net of allowance
     for doubtful accounts                     88,136       64,936      9,503
    Prepayments for purchase of
     merchandise paid to related parties       70,306       66,366      9,713
    Amounts due from related parties            7,244       27,837      4,074
    Prepaid expenses, deposits and other
     current assets                           178,354      138,975     20,339
    Inventories                               373,689      273,898     40,085
    Deferred income taxes                      15,863       15,646      2,290
    Total current assets                    2,572,476    2,469,663    361,437

    Non-current assets
    Long-term bank deposits                   200,000      200,000     29,270
    Held-to -maturity investment
     securities                               400,000      400,000     58,540
    Property and equipment, net               240,396      206,978     30,291
    Deposits for purchases of properties
     paid to related parties                    2,100           --         --
    Rental deposits                            28,873       28,835      4,220
    Cost method equity investments             12,638       12,638      1,850
    Equity method investments                      --       16,295      2,385
    Intangible assets                           2,390        1,971        288
    Goodwill                                   35,177       35,177      5,148
    Deferred income taxes                       4,723        2,997        439
    Total non-current assets                  926,297      904,891    132,431

    Total assets                            3,498,773    3,374,554    493,868

    Current liabilities
    Accounts payable                          267,250      237,782     34,799
    Amounts due to related parties             64,200        6,607        967
    Accrued expenses and other payables       123,905      100,780     14,749
    Dividend payable                               --      247,908     36,282
    Income tax payable                         35,344       22,216      3,251
    Total current liabilities                 490,699      615,293     90,048

    Non-current liabilities
    Deferred income                            14,992       20,185      2,954
    Deferred income taxes                      10,443       12,400      1,815
    Total non-current liabilities              25,435       32,585      4,769

    Total liabilities                         516,134      647,878     94,817

    Minority interests                         23,165           --         --

    Shareholders' equity
    Share capital                                 165          164         24
    Additional paid-in capital              2,823,668    2,663,518    389,808
    Accumulated other comprehensive loss      (38,009)     (37,750)    (5,525)
    Retained earnings                         173,650      100,744     14,744
    Total shareholders' equity              2,959,474    2,726,676    399,051
    Total liabilities and shareholders'
     equity                                 3,498,773    3,374,554    493,868

                       China Nepstar Chain Drugstore Ltd.
                 Condensed Consolidated Statements of Cash Flows
                             (amounts in thousands)

                                           Three-month period ended March 31
                                               2008        2009        2009
                                                RMB         RMB         USD

    Cash flows provided by operating
     activities                                66,225      93,488     13,682

    Cash flows (used in)/provided by
     investing activities                    (886,619)     48,606      7,114

    Cash flows used in financing
     activities                                (7,564)    (16,082)    (2,354)

                        China Nepstar Chain Drugstore Ltd.
                             Pro Forma Key Financials
                              (amounts in thousands)

                                            Three-month period ended March 31,

    Revenue                                                           451,334
    Gross profit                                                      229,048
    Gross Margin                                                        50.7%
    Income from operations                                             33,727
    Operating Margin                                                     7.5%
    Net income                                                         54,900
    Net Margin                                                          12.2%

                                                      As of December 31, 2008

    Cash, cash equivalents and other bank
     deposits                                                       1,190,873
    Total held-to-maturity investment
     securities                                                     1,041,000
    Long-term bank deposits                                           200,000
    Total assets                                                    3,383,238
    Total liabilities                                                 423,764
    Total shareholders' equity                                      2,959,474

For convenient comparison, income statement item amounts for the three-month period ended March 31, 2008 and balance sheet item amounts as of December 31, 2008 were computed on pro forma basis as if JZJ had been equity accounted for in the period.

SOURCE China Nepstar Chain Drugstore Ltd.
Copyright©2009 PR Newswire.
All rights reserved

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