Nepstar first quarter revenue increases 1.3% to RMB625.8M

May 31 2012

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, 2012.

Financial Highlights

For the quarter ended March 31, 2012:

• Revenue increased by 1.3% to RMB625.8 million (US$99.4 million), compared to revenue of RMB618.1 million in first quarter 2011
• Same store sales increased by 4.9% over the same period of 2011
• Income from operations was RMB8.7 million (US$1.4 million) compared to RMB11.8 million in first quarter 2011
• Net income was RMB7.0 million (US$1.1 million) compared to RMB10.6 million for the same period of 2011
• Cash flow from operations was RMB0.9 million (US$0.1 million), compared to RMB1.0 million for the same period of 2011

Mr. Fuxiang Zhang, Chief Executive Officer, commented, "While we are making solid progress in growing same store sales, growing our bottom line is proving to be more challenging. The general business environment remains unfavourable, which we endeavor to navigate by implementing strict cost control measures. Nevertheless, the rising labor and rental costs continue to pose challenges to our cost control efforts. In the first quarter of 2012, we continued to streamline our store network through evaluation of store performance and optimization of product offerings. We believe that by further enhancing efficiencies at the store management level, optimizing product offerings, strengthening customer service and conducting innovative marketing activities, we will gain competitive advantages over our peers."

First Quarter Results

During the first quarter of 2012, the Company opened 9 new stores and closed 64 stores which were performing below our expectations.  As of March 31, 2012, Nepstar had a total of 2,340 stores in operation.

Revenue for the quarter ended March 31, 2012 increased 1.3% to RMB625.8 million (US$99.4 million), compared to revenue of RMB618.1 million for the same period in 2011.

Same store sales (for 2,258 stores opened before December 31, 2010) for the first quarter of 2012 increased by 4.9% compared to the same period in 2011. This growth was mainly attributable to effective sales promotions carried out in March. It was also partially attributable to robust sales of cough and cold medicines and certain nutritional supplements during an outbreak of flu in southern China in March.

First quarter revenue contribution from prescription drugs was 20.6%, OTC drugs was 39.5%, nutritional supplements was 17.0%, traditional Chinese herbal products was 4.0% and convenience and other products was 18.9%.

Nepstar's portfolio of private label products included 1,914 products as of March 31, 2012. Sales of private label products represented approximately 28.2% of revenue and 40.3% of gross profit for the first quarter of 2012. This compares to approximately 29.8% of revenue contribution and 41.4% of gross profit contribution by private label products during the same period of 2011. The decline of private label products' contribution was mainly due to the introduction of more locally procured pharmaceutical products to better address local customer demand.

First quarter gross profit was RMB291.6 million (US$46.3 million), compared to RMB294.8 million for the same period of 2011. Gross profit margin in the first quarter of 2012 was 46.6%, compared to 47.7% for the same period of 2011. The decrease in gross profit margin was mainly due to the mandatory price cuts on pharmaceuticals by the Chinese government, an increase in revenue contribution by locally procured pharmaceutical products with lower gross profit margin and extensive sales promotions conducted in March.

Sales, marketing and other operating expenses as a percentage of revenue in the first quarter of 2012 decreased to 40.4% from 40.7% in the same period of 2011. This decrease from the same period of last year was primarily due to the growth in same store sales and closure of underperforming stores.

General and administrative expenses as a percentage of revenue in the first quarter of 2012 were 4.8%, compared to 5.1% for the same period of 2011. The decrease was attributable to the Company's stringent cost control policies.

As a result of the factors discussed above, income from operations in the first quarter of 2012 was RMB8.7 million (US$1.4 million), compared to RMB11.8 million in the same period of 2011. Operating margin was 1.4% in the first quarter of 2012.

Interest income for the first quarter of 2012 was RMB5.4 million (US$0.9 million), compared to RMB4.9 million for the same period of 2011. The increase in interest income was mainly due to an increase in deposit interest rates by the Chinese government.

Dividend income from cost method investments was RMB1.4 million (US$0.2 million) for the first quarter of 2012, compared to RMB2.0 million for the same period of 2011. Equity in income of an equity method investee was RMB0.7 million (US$0.1 million) for the first quarter of 2012, compared to RMB1.0 million for the same period of 2011.

Nepstar's effective tax rate was 56.8% for the first quarter of 2012, compared to 46.1% for the same period in 2011. Other than the impact from non-deductible expenses, the relatively high proportion of operating losses of the loss-making subsidiaries, of which full valuation allowances were made on their deferred tax assets, as compared to the net operating results of the Company also attributed to the high effective tax rate noted in the first quarter of 2012.

Net income in the first quarter of 2012 was RMB7.0 million (US$1.1 million), which represented RMB0.07 (US$0.01) basic and diluted earnings per American depositary share ("ADS"). This compares to net income of RMB10.6 million, which represented RMB0.10 basic and diluted earnings per ADS for the same period of 2011.

The total number of outstanding ordinary shares of the Company as of March 31, 2012 was 200.7 million. The weighted average number of ordinary shares in the first quarter of 2012 was 201.6 million. Each ADS represents two ordinary shares of the Company.

As of March 31, 2012, Nepstar's total cash, cash equivalents and bank deposits were RMB958.9 million (US$152.3 million) and its shareholders' equity was RMB1.35 billion (US$213.7 million).

In the first quarter of 2012, net cash flow from operations was RMB0.9 million (US$0.1 million) as compared to RMB1.0 million in the same period of 2011.

On April 27, 2012, Nepstar announced a special cash dividend of US$0.60 per ADS, which represents a total value to shareholders of approximately US$60.2 million. The special dividend was paid on or around May 24, 2012 to shareholders of record as of the close of business on May 7, 2012.

Business Outlook

"We are working diligently to meet the challenges posed by the macro environment and the ongoing healthcare reform, as we move into the second quarter, which is typically considered a slow season for pharmaceutical retail business in China," stated Mr. Zhang. "In addition, recent news coverage of chromium tainted capsules from certain producers in mainland China may also have a negative impact on overall consumer confidence in pharmaceutical and nutritional products in capsule form. We do, however, remain optimistic in our well-established reputation among consumers as a provider of high quality pharmaceutical products. Therefore, we believe the potential adverse impact of the publicity of such and similar incidents on our business will be substantially less than that of our competitors.  Despite the ongoing challenges in the general business environment, we remain confident about our overall strategy. We will continue to carry out product optimization and innovative marketing programs to achieve better operating results."