Too many analysts, and indeed investors, think of Tesco as a very large UK grocery retailer. While this is certainly true, the most interesting part of the business is non-food, services and overseas.  These now account for around half of the operating profits of the group.  As a result, it is one of the few large UK companies that offer genuine growth potential.

The most recent set of figures showed that already 31% of sales and 22% of profits are generated overseas.  The expansion in Asia is the most interesting and offers the greater potential. South Korea is currently the largest overseas market but its China where the real potential is on offer and the scale of the opportunity is mind boggling.  The investor trip to South Korea and China has seen some further interesting details emerge.

It is estimated that there is the potential for between 1,400 and 2,100 new shopping malls, each with a hypermarket, and scope for some 8,000 hypermarkets in all, to be constructed by 2020.  To put this in context, Tesco and its four largest competitors currently own a total of 83 shopping malls.

Tesco tell us that they are currently assessing the potential of around 90 cities with an aggregate core population double that of the UK and that they aim to have some 50 malls trading by the end of 2015.

Importantly from an investor’s perspective, Tesco will be working closely with a number of local partners both in terms of expertise but also financing.  So this expansion should not put too much strain on the balance sheet.  By 2015 it is estimated that Tesco’s Chinese operations could be delivering some £4billion in sales.

For this reason we see it as a core holding in the high alpha F&C UK Equity and F&C UK Opportunities Funds.