China Nepstar, the largest drugstore chain in China based on the number of directly operated stores, has expanded its product offerings by introducing high turnover convenience merchandise such as beverages, healthy food, household consumables, personal care products and other non-pharmaceutical products. The Company hopes that it will mitigate the near-term negative impact of ongoing healthcare reform and government policies, which have caused price reductions to pharmaceuticals that are on the national essential drug list and the reimbursement drug list.  According to a report in China, when the reporter walked into the drugstore, the store clerk persuaded him to buy rice, salt, oil and vinegar which of course were not drugs at all. By the end of 2010, customers can pay utility bills such as electricity, gas and water bills at China Nepstar drugstore chain.

China Nepstar is not alone in its move to diversify into grocery business. It has recently become popular for drugstores in China to sell grocery products in competition with supermarkets, though consumers are still used to buy such products from supermarkets.

The Company also rolled out Nepstar Shopper’s Card Program in May. The Nepstar Shopper’s Card is a prepaid card, with different face value from RMB300 to RMB3,000. Customers can use the Card to buy products at Nepstar stores. For every RMB6 of the face value of the Card, the card owner receives a bonus credit of RMB1, which can be used to purchase products in the stores.

According to China Chain Store & Franchise Association (CCSFA), China Nepstar Chain Drugstore ranked no. 70 on the 2009 China Top 100 Chain Retailers Billboard, in terms of sales revenue. For pharmaceutical retailing sector, China Nepstar ranked no.1 in terms of sales revenue as well as the number of directly operated outlets. According to CCSFA, the sales revenue of Top 100 chains hit RMB1.36 trillion in 2009, with a year-over-year growth of 13.5%, accounting for 11% of the total retail sales of consumer goods in China. The total store number of Top 100 chains has increased 18.9%, reaching 137,000. China Nepstar ranked no.1 in both sales revenue and the number of directly operated outlets for the 3rd consecutive year in pharmaceutical retailing sector.

China Nepstar will report its second quarter 2010 financial results on August 11. Its last report released in May revealed that its income for the first quarter of 2010 had increased by 12.1% year-on-year at RMB567 million, with 23.2% of its income from drug prescriptions, 36.9% from OTC drugs, 20.6% from nutritional supplements, 3.6% from Chinese herbals and 15.7 from other products. However, the net income in first the quarter was only RMB2.6 million, plunging from the previous quarter (4Q 2009)’s RMB43 million. Its January to February sales, in one of its main sales areas, the city of Hangzhou, was RMB32.68 million and the loss was RMB3.5 million. Its February sales there was RMB15.96, suffering a loss of RMB1.2 million. Though its private label stragegy has increased its gross profit margins, it has also reduced its customers base as many customers cannot find the brands they want from the store chain. In 2009, 29% of its sales revenue were from private labels, contributing 43.3%  gross profit. In the last quarter of 2009, China Nepstar added 156 stores and closed 14 during the same period.

The performance of China Nepstar in NYSE is indeed poor. Having been capped at $7.5 from November 2009 to April this year, it plunged to a 32 month low at $2.9 on July 19. It closed at $3.02 today, July 30, 2010, just 4.1% above its 32 month low. Bottom pickers should be cautious and it may be better to bet on stronger stocks.

 

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