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China Nepstar Chain Drugstore Reports Third Quarter 2008 Results
Date:11/26/2008

SHENZHEN, China, Nov. 26 /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 September 30, 2008.

    Financial Highlights

    For the quarter ended September 30, 2008:

    -- Revenue increased by 26.6% to RMB613 million (US$90 million) from
       RMB484 million for the same period in 2007
    -- Gross margin increased to 48.6% from 47.1% for the same period in 2007
    -- Net income was RMB36 million (US$5 million)
    -- Net cash flow from operations was RMB59 million (US$9 million)

"We are pleased to have achieved same store sales growth of 0.5% for the quarter and expanded sales in September, even with substantially decreased customer traffic in our stores for much of the quarter due to the Olympics and Paralympics Games that took place in China in August and September. We believe this sales growth was partially attributable to the effectiveness of our sales staff training initiative that we implemented in late July 2008. By strengthening our store staff's knowledge of both pharmaceutical and non-pharmaceutical products, we were able to enhance our customers' overall shopping experience, increase our customers' average purchase value per store visit and increase repeat customer visits," commented Mr. Jiannong Qian, Chief Executive Officer of Nepstar.

Third Quarter Results

Revenue for the third quarter of 2008 increased by 26.6% to RMB613 million (US$90 million) from RMB484 million for the same period in 2007.

Same store sales (for stores opened before December 31, 2006) for the third quarter of 2008 increased by 0.5% from the same period in 2007. Same store sales were calculated based on 1,399 stores opened as of December 31, 2006.

Gross profit in the third quarter of 2008 increased by 30.5% to RMB298 million (US$44 million) from RMB228 million for the same period in 2007. Gross margin for the third quarter of 2008 increased to 48.6% from 47.1% for the same period in 2007. The increase in gross margin was largely driven by changes in product mix, including increased contributions from private label products and centrally procured merchandise.

Sales, marketing and other operating expenses as a percentage of revenue for the third quarter of 2008 increased to 41.1% from 31.8% for the same period in 2007. The increase was primarily due to an increase in the proportion of newly opened stores in the Company's store base. As of September 30, 2008, the Company had a total of 1,268 stores opened after January 1, 2007, which accounted for 47.5% of the Company's store base. Compared to stores that have been in operation for two or more years, stores that have been in operation for fewer than two years generally generate lower revenue, but incur similar or higher rental and labor costs. The higher expense ratio was also partially due to increased salary and rental costs of older stores, which mainly reflected the overall higher inflation rate in China.

General and administrative expenses as a percentage of revenue for the third quarter of 2008 increased to 4.4% from 3.3% for the same period in 2007. The increase was primarily due to additional administrative and compliance costs related to being a publicly listed company.

As the result of the above, operating income for third quarter of 2008 was RMB19 million (US$3 million) compared to RMB58 million for the same period in 2007.

The Company's effective tax rate was 27.0% for third quarter of 2008, compared to the effective tax rate of 16.7% for the same period of 2007. The increase in effective tax rate was primary due to higher tax rates that certain of the Company's subsidiaries becoming subject to under the new PRC corporate income tax law, the recognition of withholding taxes related to profit distribution from the Company's PRC subsidiaries to the Cayman Islands holding company, and 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 third quarter of 2008 was RMB36 million (US$5 million), or RMB0.17(US$0.02) basic earnings per share, or RMB0.34(US$0.04) basic earnings per American depositary share ("ADS"), and RMB0.16(US$0.02) diluted earnings per share, or RMB0.32(US$0.04) diluted earnings per ADS. This compares to net income of RMB46 million, or RMB0.25 diluted earnings per share for the same period in 2007. The weighted average number of ADSs for the third quarter of 2008 was 110 million. Each ADS represents two ordinary shares of the Company.

As of September 30, 2008, the Company's total cash and cash equivalents was RMB1,348 million (US$199 million), held-to-maturity investment securities in total were RMB1,148 million (US$169 million) and total shareholders' equity was RMB2,978 million (US$439 million).

On August 27, 2008, the Company announced that its board of directors authorized a US$40 million share repurchase program, which has a duration of 16 months. Based on market conditions, the Company's cash flow status, general economic conditions and trading price of the ADSs of the Company, the repurchases will be made in the open market at prevailing market prices, or in block trades, which are subject to restrictions relating to volume, price and timing. As of November 24, 2008, the Company had repurchased approximately 3.8 million ADSs and had spent approximately US$16 million on the repurchase program.

Operating Highlights

During the third quarter of 2008, Nepstar opened 150 new stores organically, acquired 40 stores and closed 6 stores. As of September 30, 2008, Nepstar had a total of 2,667 stores in operation.

In early August 2008, Nepstar entered into a definitive acquisition agreement with Qingdao Kangjie Chain Drugstore Co. Ltd. ("Kangjie") to acquire all of Kangjie's 42 drugstores in Qingdao, Shandong Province for an aggregate cash consideration of RMB16.8 million (US$2.5 million). After this acquisition, the total number of China Nepstar drugstores in Qingdao exceeded 70. Kangjie was the second-largest drugstore chain in Qingdao based on the number of directly operated drugstores in 2007. All of the 42 Kangjie stores are designated national healthcare insurance reimbursement stores. As of the end of the third quarter of 2008, 40 of the acquired stores had been transferred to and were being operated by Nepstar. The remaining two stores are expected to be transferred in the fourth quarter of 2008.

In the third quarter of 2008, revenue contribution from prescription drugs was 21.1%, over-the-counter ("OTC") drugs was 34.7%, nutritional supplements was 22.4%, traditional Chinese herbal products was 3.1% and other products was 18.7%. The increased contribution by nutritional supplements, which was 20.0% in the second quarter of 2008, was partially attributable to the effectiveness of the sales staff training initiative that was implemented in late July 2008 and which increased the store staff's knowledge of and selling skills for nutritional supplements.

In the third quarter of 2008, Nepstar further increased sales of private label products. Nepstar's portfolio of private label products included 1,341 products as of September 30, 2008. Sales of private label products represented approximately 26.1% of revenue and 38.7% of gross profit of Nepstar for the third quarter of 2008.

"As we enter the fourth quarter, our focus is not only on growing revenue and gross margin, but also on cost reduction by streamlining our operations and eliminating redundancies. We expect to continue to generate positive cash-flow and aim to utilize our ample cash reserve effectively for future growth. Although economic growth in China is expected to slow, the economic stimulus plan recently announced by the PRC government may serve as a catalyst to bolster China's economy and benefit consumers in general, as well as Nepstar. Nepstar continues to remain financially well-equipped and operationally sound. We are working hard to maintain our position in this challenging economic environment as well as continue to extend our leadership in the marketplace," commented Mr. Simin Zhang, the Chairman of Nepstar.

Conference Call Information

The Company will host a conference call, to be simultaneously Web cast, on Wednesday, November 26, 2008 at 8:00 a.m. Eastern Standard Time / 9:00 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 November 26, 2008, at 11:00 a.m. Eastern Standard Time / November 27, 2008, 12:00 a.m. Beijing Time through December 5, 2008 at 11:59 p.m. Eastern Standard Time / December 6, 2008 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 301531.

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, 2008, the Company had 2,667 stores across 76 cities, one headquarters distribution center and 11 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 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 fourth 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$1.00 = RMB 6.7899 on September 30, 2008 in The City of New York for the cable transfers of RMB as certified for customs purposes by the Federal Reserve Bank of New York. No representation is made that the RMB amounts could have been, or could be, converted into US$ at that rate on September 30, 2008, or at any other certain date. The percentages stated are calculated based on RMB.

                                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,
                                         2007            2008         2008
                                          RMB             RMB          USD
    Revenue                             484,304         612,981       90,278
    Cost of goods sold                 (256,104)       (315,191)     (46,420)

    Gross profit                        228,200         297,790       43,858
    Sales, marketing and other
     operating expenses                (153,956)       (251,758)     (37,077)
    General and administrative
     expenses                           (15,880)        (26,779)      (3,945)

    Income from operations               58,364          19,253        2,836

    Interest income                         409          30,149        4,440
    Interest expense                        (67)             --           --
    Dividend income from cost
     method investments                      --             150           22

    Income before income tax
     expense and minority interests      58,706          49,552        7,298
    Income tax expense                   (9,778)        (13,394)      (1,973)

    Income before minority interests     48,928          36,158        5,325
    Minority interests                   (2,594)           (505)         (74)

    Net income                           46,334          35,653        5,251

    Accretion to Series A
     redeemable convertible preferred
     shares redemption value             (4,313)             --           --


    Net income attributable
     to ordinary shareholders            42,021          35,653        5,251

    Net income per ordinary share:
    Basic                                  0.25            0.17         0.02
    Diluted                                0.25            0.16         0.02




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

                                        As of           As of        As of
                                    December 31,    September 30, September 30,
                                        2007            2008          2008
                                         RMB             RMB           USD
    ASSETS
    Current assets:
    Cash and cash equivalents         2,168,911       1,348,293      198,573
    Held-to-maturity investment
     securities                         600,000         748,000      110,164
    Accounts receivable, net of
     allowance for doubtful
     accounts                            54,753          79,238       11,670
    Prepayments for purchase of
    merchandise paid to related
     parties                              4,452          92,067       13,559
    Amounts due from related
     parties                              1,408           4,919          724
    Prepaid expenses, deposits
     and other current assets           107,229         177,145       26,090
    Inventories                         285,307         348,790       51,369
    Deferred income taxes                 2,991           4,196          618

    Total current assets              3,225,051       2,802,648      412,767

    Held-to-maturity investment
     securities                              --         400,000       58,911
    Property and equipment, net         172,171         234,019       34,467
    Deposits for purchases of
     properties paid to related
     parties                              2,125           2,100          309
    Rental deposits                      22,167          28,526        4,201
    Equity investments                   12,638          12,638        1,861
    Intangible assets, net                3,135           3,349          493
    Goodwill                                 --          28,879        4,253
    Deferred income taxes                 1,254          19,617        2,889

    TOTAL ASSETS                      3,438,541       3,531,776      520,151

    LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS' EQUITY


    Current liabilities:
    Accounts payable                    233,425         246,229       36,264
    Amounts due to related
     parties                             50,544          75,961       11,187
    Accrued expenses and other
     payables                           142,505         141,267       20,805
    Income tax payable                   37,958          44,529        6,558

    Total current liabilities           464,432         507,986       74,814

    Deferred income                          --          15,335        2,259
    Deferred income taxes                    --           7,906        1,164
    Total liabilities                   464,432         531,227       78,237

    Minority interests                   18,964          22,269        3,280

    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;
     213,187,388 shares
     issued and outstanding as
     of September 30, 2008                  168             169           25
    Treasury shares                          --         (30,602)      (4,507)
    Additional paid-in capital        2,921,521       2,919,840      430,027
    Accumulated other
     comprehensive loss                 (37,957)        (38,643)      (5,691)
    Retained earnings                    71,413         127,516       18,780
    Total shareholders' equity        2,955,145       2,978,280      438,634

    TOTAL LIABILITIES, MINORITY
    INTERESTS AND SHAREHOLDERS'
    EQUITY                            3,438,541       3,531,776      520,151



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

    Cash flow
                                         Three-month period ended September 30,
                                              2007      2008           2008
                                               RMB       RMB            USD
    Cash flow provided by
     operating activities                    35,971    59,160          8,713
    Cash flow (used in)/provided
     by investing activities                (18,127)   11,373          1,675
    Cash flow used in financing
     activities                             (13,860)  (72,161)       (10,627)



    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

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SOURCE China Nepstar Chain Drugstore Ltd.
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