China Nepstar Chain Drugstore reports revenues of US$91 million for fourth-quarter 2009

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 fourth quarter and the fiscal year ended December 31, 2009.

Fourth Quarter Financial Highlights

For the quarter ended December 31, 2009: -- Same store sales grew 10.5% compared to the same period in 2008 -- Revenue increased 12.8% to RMB621 million (US$91 million) compared to RMB551 million in the fourth quarter of 2008 on an adjusted basis -- Operating income rose 13.0% to RMB42 million (US$6 million) compared to RMB37 million in the fourth quarter of 2008 on an adjusted basis -- Net income was RMB43 million (US$6 million) -- Net cash flow from operations was RMB31 million (US$4.5 million) Effective January 5, 2009, Nepstar terminated a voting rights 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 of which were located in 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, certain financial information for 2008 is shown on an adjusted basis in this press release to reflect the accounting impact of the termination of the voting rights agreement as if it had been taken place in the beginning of the relevant period.

"Our strategy of enhancing product offerings and improving store operation efficiencies is working. Our fourth quarter was highlighted by the continued improvement in same store sales and a healthy recovery in new store openings," commented Mr. Ian Wade, Chief Executive Officer of Nepstar. "As healthcare reform and economic development continued to progress and the size of middle class consumers continued to grow in China, we have seen an increased consumer spending on healthcare products. In the fourth quarter of 2009, we are pleased to see steady increases in our sales of prescription and over-the-counter ("OTC") drugs listed on the Essential Drug List ("EDL"), as well as non-EDL pharmaceutical and nutritional products. Our customers continue to enjoy our selection of products, quality services and the convenience we bring."

Fourth Quarter Results

During the fourth quarter of 2009, the Company opened 156 new stores and closed 14 stores. As of December 31, 2009, Nepstar had a total of 2,479 stores in operation.

Revenue for the fourth quarter of 2009 was RMB621 million (US$91 million), compared to RMB656 million for the same period in 2008, and RMB551 million for same period in 2008 on an adjusted basis.

For the fourth quarter of 2009, revenue contribution from prescription drugs was 27.0%, OTC drugs was 36.4%, nutritional supplements was 19.7%, traditional Chinese herbal products was 3.3% and other products was 13.6%. The higher contribution from sales of prescription drugs was mainly due to the surge of antibiotics sales related to the H1N1 epidemic.

Same store sales (for the 1,577 stores opened before December 31, 2007) for the fourth quarter of 2009 increased by 10.5% from the same period in 2008. The increase was mainly attributable to higher level of prescription and OTC drug sales related to the H1N1 epidemic. The increase was also attributable to the Company's effective marketing campaigns, streamlining of store operations, further optimization of product mix, as well as the general recovery of the Chinese economy.

Nepstar's portfolio of private label products included 1,524 products as of December 31, 2009. Sales of private label products represented approximately 28.7% of revenue and 43.4% of gross profit for the fourth quarter of 2009.

For the fourth quarter of 2009, gross profit was RMB298 million (US$44 million), compared to RMB299 million for the same period in 2008 and RMB272 million for the same period in 2008 on an adjusted basis. Gross margin for the fourth quarter of 2009 was 47.9% compared to 45.6% for the same period in 2008 and 49.4% for the same period in 2008 on an adjusted basis. The decrease in gross margin for the fourth quarter of 2009 compared with the same period in 2008 on an adjusted basis was mainly due to the expansion of the breadth of product offerings and price ranges to maintain competitiveness, and higher branded product sales associated with the H1N1 epidemic.

Sales, marketing and other operating expenses as a percentage of revenue for the fourth quarter of 2009 was 37.1%, compared to 36.2% for the same period in 2008 and 38.6% for the same period in 2008 on an adjusted basis. The decrease in sales, marketing and other operating expenses as a percentage of revenue for the fourth quarter of 2009 compared to the same period in 2008 on an adjusted basis was primarily due to the implementation of effective cost control measures, which resulted in a reduction of headcount, closure of non- performing stores and improved economies of scale.

General and administrative (G&A) expenses as a percentage of revenue for the fourth quarter of 2009 were 4.1%, compared to 3.6% for the same period in 2008 and 4.1% for the same period in 2008 on an adjusted basis.

As a result of the previously mentioned factors, operating income for the fourth quarter of 2009 increased to RMB42 million (US$6 million), compared to RMB38 million for the same period in 2008 and RMB37 million for the same period in 2008 on an adjusted basis. Operating margin improved from 6.1% in the third quarter to 6.7% for the fourth quarter of 2009, compared to 5.9% for the same period in 2008 and 6.7% for the same quarter of 2008 on an adjusted basis.

Interest income for the fourth quarter of 2009 was RMB15 million (US$2 million) compared to RMB27 million for the same period in 2008 both on an actual basis and on an adjusted basis. The decrease in interest income was primarily due to (i) the maturity of a majority of the held-to-maturity investment securities of which the proceeds were placed in bank deposits; (ii) a general decrease of interest rates for bank deposits; and (iii) lower cash balances as a result of the dividend payment of approximately RMB248 million (US$36 million) in May 2009 and a special dividend payment of approximately RMB1,034 million (US$151 million) in fourth quarter of 2009.

Other income in 2009 of RMB9 million (US$1 million) represented a gain on deconsolidation of Yunnan JianZhiJia Chain Drugstore Co. Ltd. ("JZJ"), which equaled to the excess of fair value of the Company's 40% non-controlling interest in JZJ over its book value.

Nepstar's effective tax rate was 35.3% for the fourth quarter of 2009, compared to 27.6% for the same period in 2008 and 27.7% on an adjusted basis. The increase in effective tax rate was primarily due to the deferred tax liability recognized for the excess of the accounting carrying amount over the tax basis of equity interest in JZJ, which amounted to RMB7 million (US$1 million) and accounted for 5.7% of the increase in effective tax rate. Excluding this effect, the effective tax rate was 29.6%, which was due to the 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 attributable to Nepstar's ordinary shareholders for the fourth quarter of 2009 was RMB43 million (US$6 million), which represented RMB0.20 (US$0.03) basic and diluted earnings per ordinary share and RMB0.40 (US$0.06) basic and diluted earnings per American depositary share ("ADS"). This compares to net income of RMB46 million, which represented RMB0.22 basic and diluted earnings per ordinary share and RMB0.44 basic and diluted earnings per ADS for the same period in 2008. The total number of outstanding ordinary shares of the Company as of December 31, 2009 was 210 million. The weighted average number of ADSs for the fourth quarter of 2009 was 105 million. Each ADS represents two ordinary shares of the Company.

As of December 31, 2009, Nepstar's total cash, cash equivalents and other bank deposits were RMB666 million (US$98 million), restricted cash was RMB765 million (US$112 million), held-to-maturity investment securities were RMB400 million (US$59 million) and total shareholders' equity was RMB1,778 million (US$260 million). Short-term loans stood at RMB470 million (US$69 million), which were the bank borrowings utilized to pay the special dividend, since some investment securities and fixed deposits had not yet matured. Bank deposits of RMB750 million were pledged to obtain the short-term bank loans and credit facilities. As of the date of this press release, the short-term loans have been repaid and the restriction on the pledge bank deposits has been released. The net cash provided by operating activities during the fourth quarter of 2009 was RMB31 million (US$4.5 million).

Fiscal Year 2009 Financial Results

Total revenues for 2009 was RMB2,218 million (US$325 million) compared to RMB2,397 million for 2008, and RMB2,014 million for 2008 on an adjusted basis.

Same store sales (for stores opened before December 31, 2007) for 2009 increased by 2.6% compared to 2008. Since the second quarter of 2009, Nepstar undertook a series of measures to boost same stores sales, including expanding product offerings, adjusting price ranges, streamlining store operation and enhancing marketing campaigns. As a result, same store sales experienced a 3.8% increase in the third quarter, and a 10.5% increase in the fourth quarter, respectively.

In 2009, revenue contribution from prescription drugs was 23.2%, OTC drugs was 36.9%, nutritional supplements was 20.6%, herbal products was 3.6%, and other products was 15.7%.

In 2009, private label products accounted for 29.0% of total revenue and 43.3% of gross profit, respectively. This compares to 28.4% of revenue contribution and 40.6% of gross profit contribution by private label products in 2008 on an adjusted basis.

Gross profit was RMB1.1 billion (US$157 million) for 2009 compared to RMB1.1 billion for 2008 and RMB1.0 billion for 2008 on an adjusted basis. In 2009, gross margin was 48.4% compared to 47.5% in 2008, and 50.8% in 2008 on an adjusted basis. The decrease in gross margin for 2009 compared to 2008 on an adjusted basis was mainly due to the expansion of the breadth of product offerings and more proactive marketing approach to maintain competitiveness.

Income from operations was RMB110 million (US$16 million) for 2009 compared to RMB141 million for 2008, and RMB128 million for 2008 on an adjusted basis. Total operating expenses accounted for 43.5% of total revenue in 2009 as compared to 41.6% in 2008, and 44.4% in 2008 on an adjusted basis. This improvement was largely due to stringent cost control measurement, store efficiency enhancement, and closure of some non-performing stores. As a result, operating margin was improved from 2.6% in the first quarter of 2009, to 4.1% in the second quarter, 6.1% in the third quarter, and 6.7% in the fourth quarter.

Net income attributable to Nepstar's ordinary shareholders was RMB140 million (US$21 million) for 2009 compared to RMB193 million for 2008. The Company reported RMB1.34 (US$0.20) basic earnings per ADS, and RMB1.32 (US$0.20) diluted earnings per ADS for 2009. This compares to RMB1.80 basic earnings per ADS and RMB1.76 diluted earnings per ADS for 2008. In comparison with 2008, Nepstar's lower net income was mainly due to lower interest income, which was attributable to (i) the maturity of a majority of the held-to- maturity investment securities of which the proceeds were placed in bank deposits; (ii) a general decrease of interest rates for bank deposits; and (iii) lower cash balances as a result of the dividend payment of approximately RMB248 million (US$36 million) in May 2009 and special dividend payment of approximately RMB1,034 million (US$151 million) in the fourth quarter of 2009.

On March 16, 2009, Nepstar declared a cash dividend of US$0.35 per ADS, or approximately RMB248 million. The cash dividend was paid in May 2009, to shareholders of record as of the close of business on April 16, 2009.

On August 24, 2009, Nepstar declared a special dividend of US$1.50 per ADS. In November and December 2009, approximately RMB1,034 million (US$151 million) was paid out to shareholders of record as of the close of business on September 25, 2009.

On March 2, 2010, the three independent directors of the Company voluntarily forfeited options to purchase an aggregate of 150,000 ordinary shares of the Company at an exercise price of US$8.10 per ordinary share (US$16.2 per ADS), which were granted in November 2007, and waived the right to certain payments from the Company, which provided for a minimum return from the exercise of such options. In exchange, the Company granted the independent directors an aggregate of 150,000 restricted ordinary shares, which vested immediately. In addition, 50,000 restricted ordinary shares of the Company subject to a vesting schedule were granted to an executive of the Company. The exchange and grants were conducted to provide additional incentive and retention value and was approved by the board of directors of the Company and its compensation committee.

Latest Developments and Business Outlook

In October 2009, Nepstar entered into a definitive agreement with Wenzhou Ren Ren Hao Chain Drugstore Ltd. ("Ren Ren Hao") to acquire the operations of all of its eight drugstores in Wenzhou City. This acquisition represents China Nepstar's first retail presence in Wenzhou, one of the most affluent markets in Zhejiang province in terms of consumption power. The eight Ren Ren Hao drugstores have an average store size of 250 square meters and are located in the city center or in prime locations in nearby major townships. The transaction was completed in February 2010 with the eight stores transferred to Nepstar.

In December 2009, Nepstar entered into a definitive agreement with Beijing Xiang Yun Kang Drugstore, to acquire all of its six drugstores in Beijing. This acquisition will be Nepstar's second acquisition in Beijing. The six drugstores are all located in densely populated residential areas in Beijing. The transaction was completed in February 2010 with the six stores transferred to Nepstar.

Mr. Wade concluded, "In 2010, we will continue to focus on executing our strategy of improving store efficiencies and enhancing product offerings. Our close attention to same store sales, operating margin and free cash flow generation remains unchanged. We will be more active in opening and acquiring stores in areas where economic trends are favorable. With more smaller-sized competitors struggling with margin erosion as a result of healthcare reform in China, the consolidation of the fragmented drugstore industry is bound to accelerate. We believe Nepstar is well-positioned to capture opportunities brought by the evolving competition landscape."

SOURCE China Nepstar Chain Drugstore Ltd.