Gross profit declines for China Nepstar Chain Drugstore in second quarter 2009 when compared to the same period in 2008

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.