China Nepstar Chain Drugstores, Ltd. Calls

On November 6th, we sold thirteen China Nepstar 7.50 calls which expire in March for $75 each. If exercised, our effective sales price of the 1,300 shares will be $8.25 per share, for a gain of roughly 214% on our purchase price before commissions. This return is calculated before taking into account this year's $.35 dividend, and the special dividend of $1.50 which will be paid around December 31st (which raises our return to roughly 262% in the aggregate, before commissions, not taking into account time differences in payment of the dividend, sale of the calls and sale of the stock). Note that the stock is now ex-dividend, and the price currently reflects the December special dividend.

Selling these options and our accrual of dividends has given us the ability to recoup approximately 67% of our initial investment in a short amount of time. The drastic multiple expansion and stock appreciation has occurred with relatively lackluster earnings reports and only modest expansion in Nepstar's business. $7.50 a share represents a roughly 20x EV/trailing EBITDA multiple - far above the 8x target we had discussed in our initial write-up. We have decided to sell the options to give ourselves time to see if the business fundamentals will catch up to the current valuation, and support continued investment. If this is not the case we will be very happy with our exit price with a holding period of just over one year.