China Nepstar Chain Drugstore first quarter revenue increases 9.0% to US$94.4 million

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 first quarter ended March 31, 2011.

Financial Highlights

For the quarter ended March 31, 2011:

• Revenue increased by 9.0% to RMB618.1 million (US$94.4 million), compared to revenue of RMB567.2 million in first quarter 2010
• Same store sales increased by 8.9% over the prior year's period
• Income from operations was RMB11.8 million (US$1.8 million) compared to a loss of RMB4.2 million in first quarter 2010
• Net income was RMB10.6 million (US$1.6 million) compared to RMB2.6 million for the same period of 2010

Mr. Jason Wu, Chief Executive Officer of Nepstar, commented, "We are pleased to share the positive progress of our strategic transition to a neighborhood store for one-stop pharmacy and convenience shopping. New merchandise in our convenience products category has contributed to the increase of sales by 8.9% on a same store basis, despite ongoing government pricing controls over some of our core pharmaceutical products.

"Household consumables continued to deliver growth in sales, which underscores our theme of bringing health and value to our customers' daily life.  We believe there is further growth potential in the convenience and household consumables market, where we may leverage our large store network and logistics coverage to our advantage.

"Our plan is to continue to introduce high-quality household consumables at competitive prices with the goal of increasing the average spending per customer per visit and to further drive same store productivity."

First Quarter Results

During the first quarter of 2011, the Company opened 25 new stores and closed 39 stores.  As of March 31, 2011, Nepstar had a total of 2,533 stores in operation.

Revenue for the quarter ended March 31, 2011 increased 9.0% to RMB618.1 million (US$94.4 million), compared to revenue of RMB567.2 million for the same period in 2010. Increased sales of newly introduced convenience products continued to offset the negative impact on drug sales from ongoing healthcare reform that has led to price cuts and diversion of patients from drugstores.

First quarter revenue contribution from prescription drugs was 19.6%, OTC drugs was 37.7%, nutritional supplements was 17.9%, traditional Chinese herbal products was 4.0% and convenience and other products was 20.8%. During the first quarter, the Company introduced 37 new SKUs (Stock Keeping Units) within the convenience products category. Sales of convenience products accounted for approximately 12.5% of total revenue for the first quarter.

Same store sales (for 2,275 stores opened before December 31, 2009) for the first quarter of 2011 increased by 8.9% compared to the same period in 2010. This growth was mainly attributable to increased sales of household consumables and other new non-pharmaceutical products introduced in the second half of 2010.

Nepstar's portfolio of private label products included 1,788 products as of March 31, 2011. Sales of private label products represented approximately 29.8% of revenue and 41.4% of gross profit for the first quarter of 2011.

First quarter gross profit was RMB294.8 million (US$45.0 million), compared to RMB272.2 million in the same period of 2010. Gross profit margin in the first quarter of 2011 was 47.7%, compared to 48.0% in the same period of 2010. The change in gross profit margin was mainly due to changes in revenue mix as the Company has introduced more household consumables with a lower gross profit margin compared to pharmaceuticals. The Company continued to make efforts to provide good-value private label products in convenience products category. In the first quarter, private label products' contribution to the convenience products category also reached 30.2%, helping maintain a reasonably favorable gross profit margin level on sales of convenience products.

Sales, marketing and other operating expenses as a percentage of revenue in the first quarter of 2011 decreased to 40.7% compared to 42.9% in the same period of 2010. This decrease from the same period of last year was primarily due to higher sales revenue generated from the diversification strategy and rigorous cost control measures.

General and administrative expenses as a percentage of revenue in the first quarter of 2011 were 5.1%, compared to 5.8% in the same period of 2010. The decrease was also due to cost control efforts and a higher revenue base in 2011.

As a result of the factors discussed above, income from operations in the first quarter of 2011 was RMB11.8 million (US$1.8 million), compared to a loss of RMB4.2 million in the same period of 2010. Operating margin was 1.9% in the first quarter of 2011.

Interest income for the first quarter of 2011 was RMB4.9 million (US$0.7 million), compared to RMB8.2 million in the same period of 2010. The decrease in interest income was mainly due to lower cash balances as a result of the dividend payments in 2010 and 2011, and share buyback program in 2010. Dividend income from cost method investments was RMB2.0 million (US$0.3 million), compared to that of RMB3.0 million in the same quarter of 2010. Equity income of an equity method investee was RMB1.0 million (US$0.2 million), compared to that of RMB1.8 million in the same quarter of 2010.

Nepstar's effective tax rate was 46.1% for the first quarter of 2011, compared to 66.8% for the same period in 2010. The decrease in effective tax rate was primarily because less valuation allowance was made for the deferred tax assets of loss-making subsidiaries due to their improved profitability in the first quarter of 2011.

Net income in the first quarter of 2011 was RMB10.6 million (US$1.6 million), which represented RMB0.10 (US$0.02) basic and diluted earnings per American depositary share ("ADS"). This compares to net income of RMB2.6 million, which represented RMB0.02 basic and diluted earnings per ADS in the same period of 2010. The total number of outstanding ordinary shares of the Company as of March 31, 2011 was 207.8 million. The weighted average number of ordinary shares in the first quarter of 2011 was 207.8 million. Each ADS represents two ordinary shares of the Company.

As of March 31, 2011, Nepstar's total cash, cash equivalents and bank deposits were RMB983.7 million (US$150.2 million) and its shareholders' equity was RMB1,375.5 million (US$210.0 million).

In the first quarter of 2011, net cash flow from operations was RMB1.0 million (US$0.2 million).

On January 18, 2011, Nepstar announced a special cash dividend of US$0.30 per ADS, which represents a total value to shareholders of approximately US$31 million. The distribution of the special dividend was partly paid around February 28, 2011 to shareholders of record as of the close of business on January 31, 2011.

In April 2011, Nepstar's Board approved the transfer of 100% ownership of Shenzhen Nepstar Industrial Co., Ltd. ("Nepstar Industrial"), a subsidiary company, to Neptunus Group, a related party. Nepstar Industrial has a registered capital of RMB100 million and paid-in capital of RMB20 million as of March 31, 2011. The net asset of Nepstar Industrial as of March 31, 2011 was RMB20 million. Neptunus Group will pay Nepstar RMB20 million in cash, to acquire Nepstar Industrial. Nepstar has not conducted any operations under Nepstar Industrial since its establishment in 2009. The purpose of the transaction is to simplify corporate structure and the divestment is not expected to influence Nepstar's financial position or business.

Business Outlook

"We expect that Chinese healthcare sector reform will be prolonged, as government policy initiatives take time to be thoroughly implemented," stated Mr. Wu.  "While the overall drugstore sector continues to experience revenue erosion and smaller chains and generic drug makers struggle, our shift to a hybrid model of pharmacy and convenience enables us to broaden our revenue stream and compensate for lost drug sales.  Moreover, the growth in sales of our household consumables enhances our chance of private labeling in this product category. We believe Nepstar is on its way to providing for even more consumers' healthcare and quality life needs. However, it may take some time to see an impact on our bottom line from the introduction of new products. We are still developing our product mix strategy, as we continue to assess the contribution of new product categories to our sales revenue and profitability."