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China Nepstar Chain Drugstore Ltd. (NYSE:NPD)

Q2 2008 Earnings Call Transcript

August 27, 2008 8:00 am ET

Executives

Dixon Chen – IR, Grayling Global

Jiannong Qian – CEO

Andrew Weiwen Chen – VP and CFO

Lucia Qian – Marketing, IR Director

Analysts

Bin Li – Morgan Stanley

Quanan Ho [ph] – Goldman Sachs

Sophie Lam – Roth Capital Partners

Jodie Wehner – Global Hunter Securities

John Chen – Owl Creek

Justin Lu – Credit Suisse

Sailesh Mishra [ph] – PCI [ph]

Operator

Greetings and welcome to the China Nepstar Chain Drugstore Ltd. fiscal second quarter earnings conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator instructions) As a reminder this conference is being recorded.

It is now my pleasure to introduce your host Dixon Chen, Grayling Global for China Nepstar Drug Chain Drugstore Limited. Thank you Mr. Chen, you may now begin.

Dixon Chen

Thank you, operator. If you have not received a copy of Nepstar’s second quarter 2008 earnings press release, it is currently available on the company’s website at www.nepstar.cn. A presentation to accompany today’s call and live webcast is also available on the website under the Investor Relations section.

Before we start I would like to remind you that certain statements are not of historical facts made during the course of this conference call about future events, financial results, constitute forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. You should note that the company’s actual results may differ materially from those projected in the statements due to the variety of factors affecting the business.

Forward-looking statements are subject to risks and uncertainties. Discussions of factors that may affect future results are contained in our filings with the Securities and Exchange Commission. We undertake no obligation to correct or update any forward-looking statements provided as a result of new information, future events or even changes in expectations.

Joining us on today’s call are Dr. Simin Zhang, Chairman of the Board, Mr. Jiannong Qian, Chief Executive Officer, Andrew Weiwen Chen, Chief Financial Officer and Mr. Zixin Shao, Interim Chief Financial Officer effective September 1, 2008 and Ms. Lucia Qian, Marketing, IR Director who will also be our translator during the question-and-answer session. We will be translating questions and answers and ask for your patience at that time.

Mr. Qian, CEO will now deliver his opening remarks. Please go ahead Jiannong.

Jiannong Qian

Thank you, Dixon. Good morning and good evening. I would like to welcome you all to China Nepstar Chain Drugstore’s second quarter 2008 financial results conference call. Before we get into the financial results, I would like to share some perspective on the quarter and today’s announcements regarding our CFO transition.

First I would like to say that we are relatively pleased to that second quarter revenue performance and a new store opening whereas expected in the quarter, which show some of the worst natural disaster in China’s recent history. Both the early weather and the torrential rains adversary effect in store traffic for significant periods of time during this quarter. We were able to recoup much of these lost of sales however through proactive efforts to improve customers, average of purchase per store visit and overall shopping experience.

When such initiative including a series of training programs to increase our store staff knowledge of nutritional supplements those at see might better guide the customers who inquire about certain needs. We believe the same program can be expanded to incorporate as a non-pharmaceutical product. With regard to profitability we succeeded in surprising last year’s performance by almost 19%, but fell slightly shot of our own expectation for the quarter, due to higher than expected rental costs and salary increases.

As we move into the later part of the third quarter, we’re also seeing the effects of regulatory changes associated with this year’s spotting events in China. This included tighter regulations around the sales of pharmaceutical products containing steroid ingredients. Store expansions have slowed down as well, due to the in excess of ability of license during the 2008 (inaudible) figures.

In light of all of these factors we have decide to adjust our initial expansion plans to devote more of our resources to improving the productivity of our existing stores. We believe than this shift in strategy will further enhance our competitive position among PS. as they struggle even harder to succeed in this increasing the challenging environment with limited financial resources and the weak negotiating provision with surprise. Ultimately, we view this situation as an opportunity for us to leverage our relative strength and the capital resource to pursue and take acquisition target at increasingly attractive valuations.

At this time I’d like to switch gears and discuss the resignation of our CFO Mr. Andrew Chen. As we’ve stated in our press release today. Mr. Chen is leaving Nepstar for personal reasons effective August 31. Mr. Zixin Shao our current Financial Controller who will be acting as Interim CFO where we conduct a rapid and sever search for replacement. Mr. Shao has been with Nepstar since 2002 and the prior to this with the Financial Director in China Resources Supermarket (Suzhou) Co., Ltd.

Now let me turn the call over to Andrew, who will discuss the financial results of the second quarter. After Andrew’s prepared remarks I would discuss about the company’s financial and a strategic outlook.

Andrew Weiwen Chen

Thank you Mr. Chen, ladies and gentlemen. Thank you for joining us today. This is the last time I participate in a company’s quarterly conference call with the investment community. I would like to take this opportunity to thanks Chairman Zhang, Simin, next our Board of Director’s, the company and the investment community for all your support during my tenure at the company. I resign to pursue other opportunities; I have reviewed and approved all financials for 2007 in the first two quarters of 2008. I would serve my duties with the company until August 31, 2008.

Now let me walk you through the company’s performance for the quarter. Revenue for the second quarter increased by 21.5% year-over-year to RMB585 million. Second quarter revenue contribution from prescription drugs was 22.1%, over-the-counter or OTC drugs was 34.5%, nutritional supplements was 20%, traditional Chinese herbal products was 2.9% and the other products was 20.5%.

Same-store sales for the second quarter decreased by 1.3% year-over-year, this decrease was mainly due to that impact of the three week long heavy rain storm in South china in June. Particularly, in Guangdong Province were more than 25% of the company stores are based. The earthquake in Sichuan Province in May 2008 also impacted the company’s operation in that market. Same-store sales were calculated based on the sales of 1,405 stores, which were in operation before 2007.

Our second quarter gross profit increased by 38% year-over-year to RMB283 million. Gross margin for the quarter increased by 5.7 percentage points to 48.3% in comparison with the same period of 2007, the increase in year-over-year gross margin was driven largely by changes in product mix, including increased contributions from private label and centrally procured products. However, gross margin increased only slightly from the first quarter of this year as the overall high inflation in China targeted to impact our costs of products, especially for our regionally procured products, which are subject to more procurement price controls by the vendors.

Second quarter operating income increased slightly to RMB43 million compared to RMB42 million for the same period in 2007 up by 1.7 percentage points primarily due to higher expense ratio in a quarter. In comparison it was the same period of 2007 sales, marketing and other operating expenses as a percentage of revenue for the second quarter increased to 36.7% from 29.7%. This increase is primarily due to increased salary and rental expenses, which have been driven by the overall high inflations in Chinese economy.

The high expense ratio was also caused by the increased proportion of our newly opened stores in a company’s store base compared to more mature stores newly opened stores typically generated lower revenue as a they incur comparable rental and labor expenses. In comparison with the same period of 2007, general and administrative expenses as a percentage of revenue for the second quarter increased from 4.1% to 4.3% primarily due to additional administrative and compliance expenses associated with the company’s current status as a listed company.

The company’s income tax rate was 20.2% for second quarter compared to 25.4% in the same period of 2007. This was primarily due to reduction of our deferred tax assets variation announce in this quarter based on our assessment. Year-over-year net income for the second quarter increased 88.4% to RMB56 million or RMB0.26 basic earnings per share and RMB0.52 basic earnings per ADS or RMB0.26 diluted earnings per share and RMB0.52 diluted earnings per ADS.

This compared to a net income of RMB30 million or RMB0.15 basic earnings per share and RMB0.15 diluted earnings per share for the same period in 2007. The weighted average number of ordinary shares used to calculate basic earnings share per ordinary share for the second quarter was $216 million. Each ADS represents two ordinary shares. As of June 30, 2008 the company’s total cash and cash equivalents were RMB1349 million. We also had health maturity investments securities of RMB1215 million. Our total shareholders equity was RMB2990 million.

Nepstar’s portfolio of private label products expanded to 1345 products as of June 30, 2008. Sales of private label products represented approximately 23% of revenue and 35.2% of gross profit of the company for the second quarter. We added 234 new stores in the second quarter. The company has 2483 stores in operation as of June 30, 2008.

In early August Nepstar entered into a definitive of acquisition agreement with Kangjie to acquire all Kangjie's 42 drugstores in Qingdao, Shangdong Province for an aggregate cash consideration of RMB16.8 million. This acquisition will bring the total number of China Nepstar drugstores in Qingdao to over 70 when the transaction is expected to close at the end of August.

Kangjie Chain Drugstore was the second largest chain in Qingdao based on the number of directly operated drugstores in 2007 with sales revenue of approximately RMB27 million in 2007. All of the 42 Kangjie stores were our designed our designated national healthcare insurance reimbursement stores. Qingdao is one of China’s largest sea ports with a population of $7.6 million.

Now let me turn the call back to Mr. Qian, our CEO he will discuss guidelines for the third quarter and the remainder of the year.

Jiannong Qian

Thank you, Andrew. For the third quarter of 2008 targeted revenue is expected to be between approximately RMB550 million and RMB570 million. Targeted net income is expected to be between approximately RMB34 million and RMB36 million. This outlook is based on the assumption that approximately 100 new store will be added in the third quarter of 2008.

Targeted revenue for fiscal 2008 is currently expected to be between approximately RMB2.2 billion and RMB2.3 billion, targeted net income as we expected to be between approximately RMB190 million and RMB210 million. Total new store including organic new store openings and acquisitions for 2008 is expected to be 650. This guidance reflects Nepstar’s current views with respect to operating and market conditions.

Looking back in the past of few years, we have successfully built the largest or directly operated retail pharmaceutical in China. The introduction of our private label program and essential procurement has also enabled us to expand our gross margin. We believe that Nepstar has the right asset and strategy in place to where this through today’s more challenging market environment, the adjustments to our short-term growth reason not only showed our ability to quickly adapt to the market trend, but enables us to continue to focus on enhancing operating, efficient and optimizing growth at existing stores.

While we pursue in majestic acquisitions and a more there is to face of new store opening. In the meantime we start to tighten internal cost control increased sales in the matured stores and expedite the maturing pace of newly established stores. In summary, our long-term strategy remains impact, and our competitiveness in the marketplace continues to be strong.

With that let me join Dr. Zhang and Mr. Shao and Lucia to take your questions. Operator, please begin the Q&A.

Question-and-Answer Session

Operator

(Operator instructions) Our first question is coming from the line of Bin Li with Morgan Stanley. Please proceed with your question.

Bin Li – Morgan Stanley

Thanks for thanking my question. I have a couple of questions on the same-store sales and on the other hand operating cost. So first question on the same-stores sales I just want to understand a little better with historical members and you commented on the Q2 nature disasters for example flooding and earthquake in this quarter. The same-store sales were down sequentially and I want to understand if I understand correctly the earthquake happened in May and flooding happened in June. Can you comment on the same-store sales growth in each of the month of the quarter which is April, May and June and so what we can see what kind of impact of the disasters on the monthly same-store sales trend and more importantly going forward for this quarter, for the third quarter and when we understand Olympics will have impact on the same-store sales and can you tell us what other trends you are seeing now because we are were in the third corns of the quarter?

(Foreign Language)

Lucia Qian

(Interpreted) In the second quarter actually we reported a minus 1.3% decrease same-store sales year-over-year. Digital wise if you see we reported minus 3 same-store sales decline in the first quarter of this year and the decline in the first quarter of last year, was also around 3% minus. So, you can see that we’re actually working our very robust to improve the same-store sales and to check the declining trend of same-store sales.

In terms of the monthly data for the second quarter April actually we reported a minus 2% same-store sales decline. In May we see a positive 2% same-store sales growth and June it’s a minus 1.5% same-store sales decline and in the third quarter we will see that in July, the same-store sales reported very much the same as the performance of the stores of last year in July and August due to the heavy impacted court by the regulatory changes associated with the Olympic games. The same-store sales in, August up to today is minus 5%.

(Foreign Language)

Lucia Qian

(Interpreted)

No actually we observed that the decline in same-store sales in August was primarily due to the regulatory change, but also partially due to the traffic that was kind of held back by the people habitat by staying at home more watching the game and since the Olympic game was over last Sunday, so these three days prior to Olympic days we see that the recovering sign in terms of the traffic to our stores.

Bin Li – Morgan Stanley

Yes, I just wanted to follow-up on that. So if the traffic has comeback, if the size of the ticket for each transaction is it still remains the same or do you are seeing some decreasing because of the government regulation still?

(Foreign Language)

Lucia Qian

(Interpreted) With the recovery of the traffic actually we are seeing that consumers are not buying less and this is not because the regulatory environment has been improved or the ban has been lifted. This is primarily because that the company has been working very hard in the past few months to various measures to improve per ticket, as we have stated in our press release that we have been enhancing and strengthening the training to the floor staff particularly giving those floor staff knowledge of nutritional supplements. So, that the floor staff are better equipped with the setting skills to make linked sales based on the pharmaceutical demands of our customers.

So, over the past few months we’ve seen that all our effort has worked out and the per ticket purchase has been gradually improving this year, the second quarter of this year actually in good ticking, we have 35 RMB per ticket as a result of our efforts in training our staff and the record date of the same period in 2007 is around 27 RMB per ticket.

Bin Li – Morgan Stanley

Okay thanks and the second question is on the cost side. Andrew, you see you said the cost as percent of sales has increased and it’s nearly due to salary increase or rental increasing in newly opened stores. I was wondering whether you can quantify the inflation rates for salaries, for rentals as well as the percentage of the newly opened stores as the overall costs and the second part of my question is, since right now the operating costs at percentage sales is about 37, so how should you think about ratio going forward?

(Foreign Language)

Lucia Qian

(Interpreted) For the first quarter we reported a total SG&A plus G&A percentages 40.2% and I’m, sorry SG&A 40.2% and the second it becomes 41% and while we look into those numbers, we see that the percentage of labor related to the revenue in first quarter was 18.6% and in second quarter it decreased to 18.2%, however if we take aside the RMB4 million booked in the first quarter as the year end bonus, our labor cost still goes up by 0.5 percentage point.

For the rental, rental used to account for 14.1% of the total revenue and now the number is 15.2% that is a very high level up to the second quarter, and for the same-store when we see the cost structure of the same-store, we see that for each of the same-store, we recorded a 17% of the growth in terms of the labor cost per store and the rental cost per store grow by 5.5%.

All these growth are primarily due to the inflationary environment, the overall Chinese economy is suffering from and for the new stores actually the cost of operation new store for the first half of last year was 17,000 RMB per store, but in second quarter we see that the monthly cost operation cost of a new stores for the first half of this year become RMB 24,700.

This is again caused by the inflations we are facing now and given that we see that the growth in overall SG&A cost is offsetting the margin growth that we have been achieved, we taking active measures to bring down the SG&A cost starting from now on and particularly we are going to bring down the labor cost by reallocating and the labor force that we had in place. Our usual practice was to reserve certain number of peoples in preparation for new stores to be rollout three months in advance.

Currently, we are adjusting the pace of our store openings for the next two quarters. So basically, we can have some savings in cutting out those reserved labor forces for new stores. Our rough estimate as that by mid of September, we will be able to cut out 1,300 head accounts and that should serve the purpose of saving roughly RMB3 million per month as labor cost saving and to the rental because we still have the team of store development in placed in all our branches.

Their major tasks for the rest of the year will be to actively renegotiate the existing leases and to sub-rent partial of our store spaces to other operators in this way we will have the hope to save another RMB1 million in terms of rental cost per month. We think that those measures are the right things to take to face adverse operation environment currently we are facing and that will be beneficial for the bottom-line for the rest of the quarters of this year.

Bin Li – Morgan Stanley

Okay, thanks.

Operator

Thank you. Our next question is coming from the line of Quanan Ho [ph] with Goldman Sachs. Please go ahead with your question.

Quanan Ho – Goldman Sachs

Yes, hi. I just had a few questions about new store openings for 2009. Could you talk about potentials first of all, the trends in new store openings whether or not they are come from acquisition or from organic growth, and the second question, the quality of new stores in these stores in terms of their location and customer purchasing power, I mean how do they compared with existing stores and third question is very briefly, could you give us a sense of the gross margins for your private label on procurement segment? Thanks a lot.

(Foreign Language)

Lucia Qian

(Interpreted) To the store opening pace in the year 2009 we believe that it seems that we are actively adjusting our strategies and trying to reserve our resources opportunities and focus on improving the per store productivity for the rest of the quarters of this year. We think that we’ll be able to improve the overall productivity as well as lowering the cost in the overall store basis. So, in 2009, we think that we’ll not see that new stores in terms of number of new stores will be less than that of 2008 and into the word that we want to maintain the speeding expansion of our store network at least as in Q3 of 2008.

Until then we will see more of accusations or seek for organic growth for 2009, we will carefully monitor the balancing between according to the industry operating environment. Frankly speaking, this year is very challenging to all players in this pharmaceutical retailing industry and we do see that all competitors on the enormous pressure of maintaining survival. So optimistically, we think next year we will be having more favorable opportunities in terms of doing synergetic acquisition.

(Foreign Language)

Lucia Qian

(Interpreted) The strategy of private label is still contributing very heavily to our gross margins and we see that gross margin of private label products for the quarter, the second quarter of this year is 73.9%, which is a slight growth over 73.6% of that of the first quarter of 2008 and the proportion of private label products in our overall store revenue growth 22.1% in the first quarter of 2008 to 23% of this quarter.

(Foreign Language)

Lucia Qian

(Interpreted) To the centrally procured products in the second quarter of 2008, centrally procured products account for 41.8% of the total sales, which is up from 38% of the first quarter of this year. The gross margin, the average margin commanded by centrally procured products decreased slightly from 63% of the first quarter through 59.9% of this quarter. We further squeezed out regionally procured products.

Regionally procured products accounts for 35.1% of our total sales this quarter compared to 39.9% of last quarter. The gross margin commanded by regionally procured products decreased slightly from 18.8% to 17.8% this quarter. You will see that there are attritions to the gross margin commanded by centrally procured products and regionally procured products.

This is primarily due to that those products are branded with the manufacturers brand and showed through other channels and overall already those manufacturers are under great inflation pressure due to the increase in their material cost and their labor cost and we believe that with the constant growth in our store scale as well as our determination further improve the sales proportion by private label products and centrally procured products. We think that by year end we still will be able to improve our gross margin to the approximately 50% level.

(Foreign Language)

Lucia Qian

(Interpreted) Overall for the new store quality of this year in the second quarter for the 491 stores that we opened in the first two quarters of this year per day per store sales for those new stores averagely is RMB1,559 per store per day. However, for the new stores opened for the first half of last year the number was RMB 1,496 per store per day roughly a RMB60 per store per day increase for new stores, which showed a improvement of the new stores opened this year.

(Foreign Language)

Lucia Qian

(Interpreted) For the stores that were opened in 2007, the average per store per day output in 2007 was as I said RMB1496 and for those groups of stores in the second quarter we recorded a RMB1676 per store per day output. I have to remind you that all those stores, great proportion of those new stores opened in 2007 were in the last quarter of last year. So, there is still a significant growth potential for those stores in this year, next question.

Operator

Thank you. Your next question will be coming from the line Sophie Lam with Roth Capital Partners.

Sophie Lam – Roth Capital Partners

Hello everybody, thank you for taking my questions. I have two quick one is, I’m wondering how much is the breakeven sales volume per day per store for a mature store and for a newly opened store and my second question is that in regards to a turnaround cycle, can you elaborate a little bit on the turnaround cycle for newly opened organic store? Thank you.

(Foreign Language)

Lucia Qian

(Interpreted) According to the cost structure of the second quarter actually for any store we have to reach per store per day output of RMB 1700 before you reach the breakeven point and currently we see that the starting point of the revenue for new stores is around RMB 1550 per store per day it takes roughly six months before the a new store to reach the sales revenue of RMB1700 and stabilizes there.

Historically our optimal point was that a new store can reach breakeven point within three to four months when the revenue goes to RMB1500 and stabilizes there. We think that this is a significant call for us to ration the costs of the new stores as well as the old stores and we believe if we try very hard to control the cost we will move gradually from the six to seven months of maturity cycle, turnaround cycle to our optimal cycle of three to four months.

Next question please.

Operator

Thank you, our next question is coming from the line of Jodie Wehner with Global Hunter Securities. Please go ahead with your question. Ms. Wehner your line is live.

Jodie Wehner – Global Hunter Securities

My questions regarding the 2009 outlook for the expenses, 3% and how do you look at SG&A level?

Lucia Qian

Jodie, your line was quite broken shall I repeat your question your question was about the outlook for the expenses for 2009? Right, what is the level of SG&A in 2009? Right.

Jodie Wehner – Global Hunter Securities

Can you maintain gross margin at 50%?

Lucia Qian

Okay, maintained gross margin of 50%.

(Foreign Language)

Lucia Qian

(Interpreted) To gross margin by year-end we are confident that we can reach 50% of gross margin and we think that we will be able to maintain that level of 50% in the year 2009 and we believe that if we further strengthen our central procurement of private label strategy there’s still 1 to 2 percentage point of growth space there. However, we do not provide guidance for 2009 at this particular moment.

(Foreign Language)

Lucia Qian

(Interpreted) Currently we are seeing that the SG&A percentage is a record high of 41%. We are taking great measures, lot of measures to address the issue by improving the productivity of the stores, I mean sales revenue of the stores as well as cost control measures to bring down the exact SG&A cost per store. Looking back our SG&A percent in 2007 fourth quarter was 36.8% and we think that with all those measures into action and with the effects gradually being reflected in 2009. The SG&A percentage should be a number between 36.8% and 41%.

Jodie Wehner – Global Hunter Securities

Thank you, do you have any revenue growth target of cash flow for 2009, or would you be able to forecast that right now?

(Foreign Language)

Lucia Qian

(Interpreted) We will provide the year 2009 guidance when we report the fourth quarter’s earnings in early next year.

Jodie Wehner – Global Hunter Securities

Okay thank you, I guess one last question just very quickly. Can you give average daily sales number for you out door?

Lucia Qian

Same store right?

(Foreign Language)

Lucia Qian

(Interpreted) For stores opened by end of 2005 per store per day output is RMB3,885 per store per day and for stores opened in year 2006, the per store per day output was RMB2,381, for stores opened in year 2007 per store per day output was RMB1,676. All those numbers are the second quarter performances of those stores.

(Foreign Language)

Lucia Qian

(Interpreted) This group of number actually was the numbers reflected in second quarter of 2008 and this quarter the sales have been adversely impacted by very unprecedented natural disasters. We’ve taken those natural disasters away we think that we could have recorded a higher per store per day output for this group of older stores.

Jodie Wehner – Global Hunter Securities

Thank you very much

Operator

Thank you. Our next question is coming from the line of Bin Li with Morgan Stanley. Please go ahead with your question.

Bin Li – Morgan Stanley

Yes, hi thanks for taking follow-up questions. I have two, first is your ongoing share buyback program. Can you comment on that and how should we understand the structure meaning, is this based on fixed price or fixed time or any other metrics that you’re using?

Lucia Qian

For the share buyback program, we’re strictly following the 10b5 procedure. We are not in a position at the moment to disclose the exact terms of the share buyback program, as this was agreed by our Board, but we are taking this chance of share buyback to show the company’s strong confidence for the future potential and the development potential of this great company.

Bin Li – Morgan Stanley

Okay and does that change your policy of dividends at all?

Lucia Qian

As far as we know it does not change our dividend policy.

Bin Li – Morgan Stanley

Okay and my second question it has to do a paragraph on your press release, which states that you had two related party procurement. Can you explain that a little bit for this quarter?

Andrew Weiwen Chen

So, a deposit transaction actually was conductive to allow the company to be able to procure our products at cheaper discounts. The two parties that we enter into contracts to purchase this goods from are controlled by the Chairman himself and by entering into this contract with the company will strictly follows a normal commercial standards as we are following with all the other vendors and the Board of Directors and the audit committee approved it and also provided personal guarantees on the contracts. So by entering into this contract the company was able to receive 8% to 10% of the rebate on the procurement value.

Bin Li – Morgan Stanley

Okay and how do you see the accounting price again on the P&L? Is it reflects on P&L?

Andrew Weiwen Chen

The accounting was conducted strictly following the U.S. GAAP and only a very small portion of that that savings that rebated being reflected in P&L as of the end of Q2.

Bin Li – Morgan Stanley

So, the rebate is booked as the costs itself?

Dixon Chen

Yes, only a very small portion of that savings, majority of that appears in either on the balance sheet or in the inventory.

Bin Li – Morgan Stanley

Okay got it, right okay thanks

Operator

Thank you our next question is coming form the line of John Chen with Owl Creek. Please go ahead with your question.

John Chen – Owl Creek

Thank you, my question has actually already been answered.

Operator

Thank you. The next question is coming form the line of Justin Lu of Credit Suisse.

Justin Lu – Credit Suisse

Just a follow-up question on the guidance. So you mention that you will only open around 650 stores for year 2008, previously you said that you’ve opened around 1050. So can you provide some reasons on why you slowdown that the number of store opened and any specific of regions you want to slowdown the store opening? Thank you.

(Foreign Language)

Lucia Qian

(Interpreted) As you have observed that the company is facing a very challenging operating environment, particularly the natural disasters, inflation and Olympic games and other spotting event cause the regulatory changes and all those adverse factors have been impacting the company’s ability to improve the same-store sales and to grow margin aggressively and taken consideration of all those, we think that it’s high time for us to pause for a while and to focus our resources into improving the productivity and profitability of the existing stores and take the time to ration all our operating costs.

The other concern, which is quite specific and which is also quite temporary is that during the Olympic game and Para-Olympic game lots of be the local SFDA taken a very conservative approach as to granting the new store licenses. Particularly, in those cities that have the host all those sporty events local government immaterially denies any license during those two sports event time.

We think that’s also a temporally, however that also lead to our consideration of tuning down the total store numbers of new stores to open this year and we believe that once we have improved the internally our core competence whereas for the external environment improved at the same time we will certainly fine tune our store opening paces and to speedup our expansion.

Justin Lu – Credit Suisse

Okay. Thanks.

Operator

Thank you. Our final question is coming from the line of Sailesh Mishra [ph], PCI [ph].

Sailesh Mishra – PCI

Yes, my question is all your stores are basically I’m guessing rental properties, have you guys strategically discussed or have come with the plan to really acquired the stores themselves like buying the rental property instead of just keep it renting out?

(Foreign Language)

Lucia Qian

(Interpreted) Currently, we still stick to renting our premises from various landlords. However, we do think that on the certain circumstances we will consider to buy all of the property to protect those stores that are generating particularly high revenue and we did have several of those stores in our history was property bought by us. Again that currently, we still stick to renting as our major stores for premises.

Sailesh Mishra – PCI

Thank you.

Operator

Thank you. There are no further questions at this time. I would like to turn the floor back over to Dixon Chen for closing comments.

Dixon Chen

Thank you for attending Nepstar 2008 second quarter earnings conference call. We look forward to speaking with you on our next conference call. Thank you.

Andrew Weiwen Chen

Thank you.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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