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China Nepstar Chain Drugstore Reports Second Quarter 2009 Financial Results
Date:8/24/2009

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.


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SOURCE China Nepstar Chain Drugstore Ltd.
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