US Edition Tesco
421.85p -4.8
Questor says BUY
The UK market is fairly mature – but developing nations in Asia offer a fantastic opportunity. The supermarket giant is currently hosting an investor and analyst trip to its operations in South Korea and China. As part of the trip, management have given an update on current trading in Asia.
In the nine weeks to October 31, like-for-like sales growth in South Korea rose 6.7pc and in China the increase was 8.3pc. Tesco expects to see growth of around 10pc in China for the "foreseeable future". In Malaysia, same-store sales in the period rose 0.5pc, in Thailand they were up 3.4pc and in India, where the group has 10 franchise stores owned by its Indian partner Trent, part of the Tata conglomerate, the increase was 18.3pc.
The problem child in the region is Japan, where like-for-likes in the nine weeks fell 5.7pc, but the group is converting stores to a new format, which it says has uplifted sales in converted stores by 20pc.
As the supermarket itself says in its analyst presentation: "The prize is enormous but the challenge is complex – China is a vast continent, with cities the size of small countries." Tesco also revealed its operations in the country are on the verge of becoming profitable.
Indeed, in the areas on which Tesco is focusing, there was an urban population of 320m in 2008 – and this is expected to grow to 420m people by 2020.
Tesco estimated that there will be demand for a mall for every 200,000 to 300,000 people – and a hypermarket needs 50,000 people. So, in 2020, the company estimates that there will be demand for between 1,400 and 2,100 malls in 2020 and 8,000 hypermarkets. By March 2011, Tesco plus the four biggest competitors, will have just 83 malls in the country. This underscores the size of the opportunity for Tesco.
The group now plans to quadruple Chinese sales to £4bn over the next five years, as it more than doubles the number of supermarkets it operates in the country.
The company has been having considerable success in Korea, the world's thirteenth largest economy. Its Homeplus brand has 118 hypermarkets and 245 Express stores. Korea has become a second growth engine for Tesco now that the acquisition has been successfully integrated. The analysts trip is taking in both China and South Korea because Tesco is "deploying all of the experience, skills and resources we've accumulated" in Korea faster into China.
Tesco's UK market share is about 30pc and although its shares have underperformed rival Sainsbury's this year, Questor still regards it as the supermarket group to back because of its international profile and prospects for its banking operations.
Tesco's current-year earnings multiple is 12.9 times, a discount to Sainsbury's on a multiple of 14.6. Morrison is trading on 12.1 times earnings.
Tesco shares are yielding 3.4pc, while Sainsbury's are supported by a higher yield of 4.2pc.
The shares were recommended as a buy on December 14, 2008, at 329¾p and they are up 28pc. The FTSE 100 has risen 33pc over the same period. The shares are a buy.