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China Nepstar Chain Drugstore Reports Net Income Growth of 304.4% for First Quarter 2008

Successful Integration of Recent Acquisitions; Continued Focus on

Operational Efficiencies

SHENZHEN, China, May 28 /Xinhua-PRNewswire-FirstCall/ -- China Nepstar Chain Drugstore Ltd. (NYSE: NPD) (''Nepstar'' or ''the Company''), the largest retail drugstore chain in China, today announced its unaudited financial results for the first quarter ended March 31, 2008.

Financial Highlights

For the first quarter ended March 31, 2008:

-- Revenue rose 16.8% to RMB543 million (US$77 million) compared to

the same period in 2007

-- Gross margin reached to 47.8%, compared with 37.7% for the same

period in 2007

-- Net income increased by 304.4% to RMB55 million (US$8 million)

compared to same period in 2007

''We are pleased to report that Nepstar successfully met the rather unusual challenges of the first quarter with determination and creativity,'' commented Mr. Jiannong Qian, Chief Executive Officer of Nepstar. ''The most severe snowstorms in China's recent history and the resulting widespread transportation dysfunction substantially reduced store traffic and caused certain out-of-stock problems at some of our stores in January and February. In response to this crisis, our team implemented a number of innovative measures to increase sales and improve profitability in the second half of February and March.''

''During the first quarter, we reorganized our 11 regional companies into 47 subdivisions and assigned managers to each division to focus on same store sales growth and new store openings. Our marketing team launched various promotions to attract customers to mature stores. We will continue to focus on improving same store sales638 12,638 1,802

Intangible assets, net 3,135 5,816 829

Goodwill -- 12,089 1,724

Deferred income taxes 1,254 5,337 761

TOTAL ASSETS 3,438,541 3,538,736 504,668



Current liabilities:

Accounts payable 233,425 234,299 33,414

Amounts due to related parties 50,544 63,374 9,038

Accrued expenses and other payables 142,505 139,178 19,929

Income tax payable 37,958 49,697 7,087

Dividend payable -- 89,646 12,785

Total current liabilities 464,432 576,754 82,532

Deferred income -- 17,389 2,480

Deferred income taxes -- 2,578 367

Total liabilities -- 596,721 85,100

Minority interests 18,964 22,326 3,184

Shareholders' equity:

Share capital - ordinary shares

USD0.0001 par value:

240,000,000 shares authorized;

213,077,944 ordinary shares

issued and outstanding as

of December 31, 2007 and

March 31, 2008 168 168 24

Additional paid-in capital 2,921,521 2,922,584 416,797

Accumulated other comprehensive loss -37,957 -38,867 -5,543

Retained earnings 71,413 35,804 5,106

Total shareholders' equity 2,955,145 2,919,689 416,384


INTERESTS AND SHAREHOLDERS' EQUITY 3,438,541 3,538,736 504,668

China Nepstar Chain Drugstore Ltd.

Condensed Consolidated Statements of Cash Flows

(amounts in thousands)

Three Months Ended March 31

2007 2008 2008


Cash flows provided by operating activities 49,611 66,225 9,445

Cash flows used in investing activities (9,338) (886,619) (126,443)

Cash flows used in financing activities -- (7,564) (1,079)

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

Grayling Global

Investor Relations

Tel: +1-646-284-9403


Ivette Almeida

Grayling Global

Media Relations

Tel: +1-646-284-9455


growth and margins going forward,'' Mr. Qian continued.

First Quarter Results

Revenue for the first quarter ended March 31, 2008 was RMB543 million (US$77 million), representing an increase of 16.8% compared to RMB465 million for the first quarter of 2007.

First quarter revenue contribution from prescription drugs was 22.3%, over-the-counter, or OTC, drugs was 37.8%, nutritional supplements was 17.6%, traditional Chinese herbal products was 3.1% and other products was 19.2%. Same store sales (for stores opened before December 31, 2006) for the first quarter of 2008 decreased by 3.0% over the first quarter in 2007. The decline was mainly due to the nationwide impact of severe snowstorm, which occurred in the second half of January and the first half of February. Same store sales were calculated based on 1,415 stores opened as of December 31, 2006.

First quarter gross profit was RMB259 million (US$37 million), an increase of 47.8% over RMB175 million for the same period in 2007. Gross margin for the quarter increased to 47.8%, compared with 37.7% 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. First quarter gross margin is typically slightly lower than that of fourth quarter, due to increased sales in regionally procured low margin branded herbal and nutritional supplements to meet demand before and during the Chinese New Year. In addition, stores that the Company recently acquired also contributed to the decrease in gross margin since these acquired stores were still in the process of selling their existing inventory, which generated lower gross margin. We expect these newly acquired stores to commence sales of Nepstar's higher margin products in the second half of 2008.

First quarter 2008's operating income increased 115.4% to RMB41 million (US$6 million) compared to RMB19 million for the first quarter of 2007.

Sales, marketing and other operating expenses as a percentage of revenue for the first quarter of 2008 increased to 35.8% compared to 30.1% in the first quarter of 2007, primarily due to an increase in the proportion of newly opened stores in the Company's store base, which, compared to mature stores, are affected more significantly by increased salary and leasing costs due to the overall higher inflation rate in China. General and administrative expenses as a percentage of revenue for the period increased to 4.4% compared to 3.5% for the same quarter in 2007, primarily due to additional administrative and compliance costs related to being a publicly listed company.

The Company's effective tax rate was 24.5% for first quarter of 2008. This has increased by 5.6 percentage points compared to the effective tax rate of full year 2007, primarily due to higher tax rates that certain of our subsidiaries are subject to under the new PRC enterprise income tax law, and the recognition of withholding taxes related to profit distribution from our PRC subsidiaries to our Cayman Islands holding company.

First quarter net income increased 304.4% to RMB55 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), or RMB0.25 (US$0.04) diluted earnings per share and RMB0.50 (US$0.08) diluted earnings per ADS. This compares to net income of RMB14 million, or RMB0.06 basic earnings per share, and RMB0.06 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 quarter ended March 31, 2008 were 213.1 million. One ADS equals two ordinary shares.

As of March 31, 2008, the Company's total cash and cash equivalents amounted to RMB1,339 million (US$191million). Total shareholders' equity reached RMB2,920 million (US$416 million) as of March 31, 2008.

On March 18, the Company declared a cash dividend on its ordinary shares of US$0.06 per share, based on its net income for the full year 2007. This dividend represented China Nepstar's first cash dividend to shareholders after completion of its initial public offering on November 9, 2007.

Operating Highlights

During the first quarter, the Company added 247 new stores, including 164 stores due to organic growth and 83 stores through acquisitions. As of March 31, 2008, Nepstar had a total of 2,249 stores in operation.

Nepstar increased its portfolio of private label products to 1,373 as of March 31, 2008. Sales of private label products represented approximately 22.1% of the Company's revenue and 34.1% of the gross profit for the quarter.

During the first quarter, the Company entered into two definitive acquisition agreements, to acquire 68 drugstores owned by Ningbo New Century Medical Ltd. in satellite districts of Ningbo City, Zhejiang Province, and 18 drugstores owned by DongGuan Hui Ren Tang Pharmaceutical Co. Ltd. in Dongguan City, Guangdong Province, respectively. As of March 31, 2008, all 18 stores of Hui Ren Tang and 65 stores of New Century have been integrated into the Company's operation and these stores contributed RMB6.2 million in revenue and RMB2.6 million in gross proifit to China Nepstar in the first quarter.

In March 2008, the Company entered into an agreement with SAP AG, a global leading Enterprise Resource Program (''ERP'') provider, to purchase the full SAP ERP system to integrate China Nepstar's company-wide accounting and operating systems. The integration is expected to increase operational efficiency, improve inventory management and enhance data analysis capabilities. Particularly, it is expected to benefit store level data analysis and to facilitate product procurement and sales promotion planning.

In April 2008, China Nepstar was awarded the title of "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.

''We are growing at a rapid rate through new store openings and consolidation of smaller drugstore chains in the fragmented Chinese marketplace,'' added Mr. Qian. ''Our central procurement and private label strategies are driving further margin expansion and we are focused on enhancing operating efficiencies and growing same store sales through an improved ERP system, geographic reorganization and supportive marketing initiatives. We will continue to invest heavily in recruiting and training talented regional managers, in-store pharmacists and other employees and improve customer service. We are confident in our ability to continue to grow in 2008.'' concluded Mr. Qian.

Business Outlook

For the second quarter of 2008, targeted revenue is expected to be between approximately RMB550 million and RMB580 million. Targeted net income is expected to be between approximately RMB62 million and RMB65 million. This outlook is based on organic store performance and approximately 240 planned new store openings in the second quarter.

These targets are based on the Company's current views on the operating and market conditions, which are subject to change.

Conference Call Information

The Company's management team will host a conference call at 9:00 a.m. Eastern Standard Time / 9:00 p.m. Beijing/Hong Kong Time on May 28, 2008 to discuss the first quarter results.

Interested parties may participate in the conference call by dialing +1- 877-407-9210 (US) or +1-201-689-8049 (International) approximately five to ten minutes before the call start time. A live Webcast of the conference call will be available on the Nepstar Web site at .

A replay of the call will be available starting on May 28, 2008, at 11:00 a.m. Eastern Daylight Time / 11:00 p.m. Beijing Time through June 4, 2008 at 11:59 p.m. Eastern Daylight Time or June 5, 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 . 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 285513.

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, 2008, the Company had 2,249 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 .

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 registration statement on Form F-1. 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$1.00 = RMB7.0120 on March 31, 2008 in The City of New York for the cable transfers of RMB as certified for customs purposes by the Federal Reserve Bank of New York. No representation is made that the RMB amounts could have been, or could be, converted into US$ at that rate on March 31, 2008, or at any other certain date. The percentages stated are calculated based on RMB.

Tables Follow

China Nepstar Chain Drugstore Ltd.

Condensed Consolidated Statements of Operations

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

Three months ended

March 31

2007 2008 2008


Revenue 464,862 542,738 77,401

Cost of goods sold -289,485 -283,477 -40,427

Gross profit 175,377 259,261 36,974

Sales, marketing and other operating

expenses -139,982 -194,496 -27,738

General and administrative expenses -16,414 -23,876 -3,405

Income from operations 18,981 40,889 5,831

Interest income 245 35,502 5,063

Interest expense -35 -- --

Dividend income from cost method

investments 845 816 116

Income before income taxes and

minority interests 20,036 77,207 11,010

Income taxes -4,625 -18,945 -2,702

Minority interests -1,836 -3,362 -479

Net income 13,575 54,900 7,829

Accretion to Series A redeemable

convertible preferred shares

redemption value -4,331 -- --

Net income attributable to ordinary

shareholders 9,244 54,900 7,829

Basic earnings per share(1) 0.06 0.26 0.04

Diluted earnings per share(1) 0.06 0.25 0.04

Note: (1): The difference between basic earnings per share and diluted

earnings per share for the three months ended March 31, 2008

is primarily due to the dilutive effect of the 8,233,556

ordinary shares issuable upon exercise of employee share


China Nepstar Chain Drugstore Ltd.

Condensed Consolidated Balance Sheets

(amounts in thousands)

As of December 31 As of March 31

2007 2008 2008



Current assets:

Cash 2,168,911 1,338,707 190,917

Held-to-maturity investment securities 600,000 1,032,380 147,230

Accounts receivable, net of

allowance for doubtful accounts 54,753 64,977 9,267

Amounts due from related parties 5,860 6,639 947

Prepaid expenses, deposits and

other current assets 107,229 139,250 19,859

Inventories 285,307 297,843 42,476

Deferred income taxes 2,991 2,464 351

Total current assets 3,225,051 2,882,260 411,047

Held-to-maturity investment security -- 400,000 57,045

Property and equipment, net 172,171 194,871 27,506

Deposit for purchase of properties

paid to related parties 2,125 2,000 285

Rental deposits 22,167 25,725 3,669

Equity investments 12,

SOURCE China Nepstar Chain Drugstore Ltd.
Copyright©2008 PR Newswire.
All rights reserved

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