Nepstar revenue increases 8.1% to RMB738.3 million (US$120.3million) in Q3 2014

China Nepstar Chain Drugstore Ltd. (NYSE: NPD) ("Nepstar" or the "Company"), a leading 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, 2014.

Financial Highlights

For the quarter ended September 30, 2014:

• Same store sales increased by 8.1% compared to the third quarter of 2013
• Revenue increased by 8.1% to RMB738.3 million (US$120.3 million) compared to RMB683.2 million in the third quarter of 2013
• Net loss was RMB13.1 million (US$2.1 million) compared to net loss of RMB4.7 million in the third quarter of 2013

Mr. Fuxiang Zhang, Chief Executive Officer of China Nepstar, commented. "We are pleased by the continuous momentum in same store sales. Our promotional campaigns for pharmaceutical products are driving growth in sales as well as average transaction value. Moreover, our store optimization strategy has created a network of stores with steadily increasing sales, enabling us to expand top line sales at a consistent pace. Our next goal will be improving gross profit."

Third Quarter Results

During the third quarter of 2014, the Company opened 48 new stores and closed 48 stores. As of September 30, 2014, the Company had a total of 2,048 directly operated stores.

Revenue for the third quarter of 2014 increased by 8.1% to RMB738.3 million (US$120.3million) from RMB683.2 million for the same period in 2013. Same store sales (for the 1,847 stores opened before December 31, 2012 and which were operating as of September 30, 2014) for the third quarter of 2014 increased by 8.1% compared to the same period in 2013. The increase in revenue and same store sales was primarily due to in-store promotional initiatives and marketing efforts for pharmaceutical products.

Third quarter revenue contribution by product category was 22.7% from prescription drugs (23.1% for the same period in 2013); 38.7% from over-the-counter ("OTC") drugs (38.2% for the same period in 2013); 13.6% from nutritional supplements (15.0% for the same period in 2013); 4.0% from herbal products (3.9% for the same period in 2013); and 21.0% from convenience and other products (19.8% for the same period in 2013).

Third quarter gross profit was RMB298.3 million (US$48.6 million) compared to RMB289.6 million in the same period of 2013. Gross margin in the third quarter of 2014 was 40.4%, compared with 42.4% in the same period of 2013. The decrease in gross margin was mainly the result of implementing product promotion initiatives.

The Company's portfolio of private label products expanded to 2,146 types of products as of September 30, 2014. Sales of private label products represented approximately 16.8% of the revenue and 24.5% of the gross profit for the third quarter of 2014.

Sales, marketing and other operating expenses as a percentage of revenue decreased slightly to 37.9% for the third quarter of 2014 from 38.3% for the same period of 2013, although the absolute value of sales, marketing and other operating expenses increased a little for the third quarter of 2014.

General and administrative expenses as a percentage of revenue were 4.1% for the third quarter of 2014 compared to 5.2% for the same period of 2013. This decrease was mainly due to a penalty charge of RMB5.7 million imposed by the Price Bureau of Yuexiu District in Guangzhou City of Guangdong Province on our subsidiary, Guangzhou Nepstar Chain Co., Ltd. for noncompliance with certain pricing guidelines for the third quarter of 2013. The Company's efforts to streamline managerial personnel also contributed to the decrease.

Loss from operations in the third quarter of 2014 was RMB13.1 million (US$2.1 million) compared with loss from operations of RMB8.5 million in the same period of 2013. This increase was mainly due to the increase in cost of goods sold, which outpaced increases in revenue and sales, marketing and other operating expenses.

Interest income for the third quarter of 2014 was RMB1.5 million (US$0.2 million), compared with RMB3.9 million for the same period of 2013.

The Company recorded a one-time gain from the disposal of subsidiaries of RMB3.0 million (US$0.5 million) in the third quarter of 2014, due to completion of the transfer of 100% ownership in the Company's subsidiary, Weifang Nepstar Pharmaceutical Co., Ltd., to an independent third party.

The Company's income tax expense was RMB4.5 million (US$0.7 million) for the third quarter of 2014, compared with RMB3.1 million for the same period in 2013. Loss before income tax expense for the third quarter of 2014 was RMB8.7 million (US$1.4 million) compared to RMB1.6 million for the same period in 2013. The effective tax rate for the third quarter of 2014 was negative 51.6%, compared to negative 196.6% for the same period in 2013. This difference in effective income tax rate was primarily attributable to higher operating losses from certain of our loss-making subsidiaries in the third quarter of 2014, for which full valuation allowances were made on their deferred tax assets.

Net loss for the third quarter of 2014 was RMB13.1 million (US$2.1 million), or RMB0.13 (US$0.02) basic and diluted loss per ADS, compared to net loss of RMB 4.7 million, or RMB0.05 basic and diluted loss per ADS for the third quarter of 2013. As of September 30, 2014, the Company had 197.4 million outstanding ordinary shares. Each ADS represents two ordinary shares of the Company.

In the third quarter of 2014, net cash outflow generated from operating activities were RMB1.2 million (US$0.2 million), compared to net cash inflow of RMB10.6 million for the same period in 2013. This difference is primarily due to greater operating losses incurred during the third quarter of 2014 compared to the same period in 2013.

As of September 30, 2014, the Company's total cash, cash equivalents, short-term and long-term bank deposits and restricted cash were RMB288.3 million (US$47.0 million) and its shareholders' equity was RMB798.2 million (US$130.0 million), compared with total cash, cash equivalents, bank deposits and restricted cash of RMB622.8 million and shareholders' equity of RMB845.5 million as of December 31, 2013. The decrease in the Company's total cash, cash equivalents, short-term and long-term bank deposits and restricted cash was primarily due to the payment of a cash dividend of approximately RMB191.2 million (US$31.6 million) to shareholders in January 2014 and the net cash outflow of RMB102.8 million (US$16.8 million) from operating activities for the nine months ended September 30, 2014.

Business Outlook

"As we head into the fourth quarter during which we usually perform well, we anticipate continued growth in the sales of both pharmaceuticals and nutritional products, enabling the improvement of gross profit," commented Mr. Zhang. "Looking ahead, China is gradually trending towards deregulation on pharmaceutical pricing after several years of vigorous implementation of stringent price controls. We believe this trend will be favorable for the healthcare retail sector in general, and we plan to capitalize on opportunities to realign pricing with the growing cost of goods."