China Nepstar Chain Drugstore first-quarter revenue increases 12.1% to $83 million

China Nepstar Chain Drugstore Ltd. (NYSE: NPD) ("Nepstar" or "the Company"), the largest drugstore chain in China in terms of the number of directly operated stores, with 2,559 directly operated stores in operation as of March 31, 2010, today announced its unaudited financial results for the first quarter ended March 31, 2010.

Financial Highlights For the quarter ended March 31, 2010: -- Revenue was RMB567 million (US$83 million), reflecting a 12.1% increase compared to revenue of RMB506 million in the first quarter of 2009 -- Same store sales increased by 6.9% -- Net income was RMB2.6 million (US$0.4 million) -- Net cash flow from operations was RMB35 million (US$5 million)

Mr. Ian Wade, Chief Executive Officer of Nepstar, commented, "Despite the unfavorable pressure brought by the various pricing ceiling policies on some of our products, we continue to achieve solid same store sales growth as our product mix offerings and promotion programs remain attractive to our customers."

"After a difficult 2008, we decided to reward our employees through a one- time bonus for their outstanding performance in 2009. We also provided an overall salary increase to our employees at both store level and corporate level to maintain our competitiveness in retaining our most critical asset -- our people. In the meantime, we have accelerated new store openings in Q4, 2009 and Q1, 2010, which has resulted in higher operating expenses. These measures inevitably impacted the first quarter results but we believe we ought to run the business with a longer term perspective."

First Quarter Results

Revenue for the quarter ended March 31, 2010 was RMB567 million (US$83 million), 12.1% higher than revenue for the first quarter of 2009 of RMB506 million.

First quarter revenue contribution from prescription drugs was 24.8%, over-the-counter ("OTC") drugs was 36.7%, nutritional supplements was 17.9%, traditional Chinese herbal products was 3.7% and other products was 16.9%. Same store sales (for 2,217 stores opened before December 31, 2008) for the first quarter of 2010 increased by 6.9% as compared to the same period in 2009. The increase was mainly attributable to effective marketing campaigns, optimization of product offerings, and the stronger economic environment in China.

Nepstar's portfolio of private label products included 1,559 products as of March 31, 2010. Sales of private label products represented approximately 26.6% of revenue and 39.8% of gross profit for the first quarter of 2010.

Gross profit was RMB272 million (US$40 million) for the first quarter of 2010, as compared to RMB244 million for the first quarter of 2009. Gross margin for the first quarter of 2010 was 48.0%, as compared to 48.2% for the same period in 2009. The decrease in gross margin was largely due to decrease in the price of products included in the national and provincial medical insurance catalogs or in the national essential drug list.

Sales, marketing and other operating expenses as a percentage of revenue for the first quarter of 2010 increased to 42.9% compared to 41.0% for the first quarter of 2009. The increase was primarily due to the one-time corporate-wide bonus that was accounted for in the first quarter of 2010 and general salary increase for store employees. The increase was also partially attributable to the opening of 156 new stores in the fourth quarter of 2009 and 104 new stores in the first quarter of 2010 which increased operating expenses. Increasing rental costs also contributed to the increase in sales, marketing and other operating expenses. For stores opened before December 31, 2008 and still in operation, total rental costs increased by 4% in the first quarter of 2010 as compared to the same period in 2009.

General and administrative expenses as a percentage of revenue for the first quarter of 2010 was 5.8% compared to 4.6% for the first quarter of 2009. The increase was primarily due to the one-time corporate-wide bonus accounted for in the first quarter of 2010, share based compensation granted to employees in the first quarter and general salary increase for corporate administrative employees.

Total bonus accounted for in the first quarter of 2010 amounted to RMB6 million (US$0.9 million).

As a result, operating loss for the first quarter of 2010 was RMB4 million (US$0.6 million) compared to operating income of RMB13 million for the first quarter of 2009.

During the first quarter of 2010, net interest income (interest income net of interest expense) was RMB7 million (US$1 million) and other investment income was RMB5 million (US$0.7 million), compared to net interest income of RMB24 million and other investment income of RMB5 million in 2009. The decrease in net interest income was mainly due to (i) the maturity of all held-to-maturity investment securities which had been earning higher interest income (ii) a general decrease of interest rates for short-term bank deposits; and (iii) lower cash balances as a result of the dividend payments in 2009.

Nepstar's effective tax rate was 66.8% for the first quarter of 2010, compared to 26.5% for the same period in 2009. The increase in effective tax rate was primarily due to the varying profitability among subsidiary companies for the first quarter of 2010, 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 and the increase in transitional tax rate from 20% in 2009 to 22% in 2010 for subsidiaries in Shenzhen.

Net income in the first quarter 2010 was RMB2.6 million (US$0.4 million), or RMB0.02 basic earnings per American depositary share (the "ADS"), and RMB0.02 diluted earnings per ADS. This compares to net income of RMB30 million, or RMB0.30 basic and RMB0.28 diluted earnings per ADS, for the first quarter of 2009. The total number of outstanding ordinary shares for the Company as of March 31, 2010 was 211 million. The weighted average number of ADSs for the first quarter of 2010 was 105 million. One ADS represents two ordinary shares.

As of March 31, 2010, the Company's total cash, cash equivalents and current bank deposits were RMB1,142 million (US$167 million), long term bank deposits were RMB200 million (US$29 million) and total shareholders' equity was RMB1,588 million (US$233 million).

On March 3, 2010, the Company announced that the Board of Directors declared a cash dividend of US$0.28 per ADS. The cash dividend was paid during the first half of May 2010 to shareholders of record as of the close of business on April 2, 2010.

First Quarter Operating Highlights

In the first quarter of 2010, Nepstar added 104 new stores and closed 24 stores. As of March 31, 2010, Nepstar had a total of 2,559 stores in operation.

Nepstar has initiated strategic collaboration with certain world-leading fast moving consumer goods companies to design and remodel a new type of health and beauty concept store for the Company. Such concept stores will allocate half of the display space of a Nepstar store to health and beauty products while maintaining the core product offerings of a conventional Nepstar store. Such concept stores will also have more modern interior decor and is aimed to attract a broader base of customers.

In addition, since the fourth quarter of 2009, Nepstar has introduced approximately 70 new Stock Keeping Units ("SKUs") of consumables and organic food products as of March 31, 2010. These new products are now sold through half of the Company's stores and contributed RMB7 million to the Company's revenue in the first quarter of 2010.

Business Outlook

Mr. Wade commented, "We remain cautious about the pressure on our operating expense for the remaining quarters of the year as various provincial governments are issuing minimum wage policies, which are affecting our labor costs. Also, we expect continued pressure as to store rental costs."

"Such cost pressure is calling for us to focus even more on the productivity of the stores. We expect the gross margin to improve in the second quarter as we continue optimizing our product offerings between products that are subject to price ceiling and products that are not so as to strike the proper balance between maintaining the breadth of our product offerings and the overall gross margin. We are also expanding our product offerings in health and beauty as well as organic food categories at a much quicker pace to attract customers and to become less reliant on pharmaceutical products. We continue to focus on growing same store sales along with strengthening customer relationships."

"We remain hopeful that the recent pricing policy by the Chinese government will shake out a number of small competitors who have already been suffering loss in the past few quarters."