The rapidly expanding Chinese cruise market, ageing population and lower fuel prices are compelling reasons to invest in cruise operator Carnival (CCL), which has succeeded in rebuilding consumer confidence following the high profile Costa Concordia disaster in 2012.

The £6.8 billion cap currently has four ships based in China but it recently announced plans to base a fifth passenger liner in Shanghai to take advantage of the tiny yet flourishing Chinese cruise industry. It is also in talks with state-owned China Merchants to build cruising ports and ships in China and last September it relocated its chief operating officer to Shanghai from Miami.

China's explosive growth

China represents just 3% of the global cruise market but it is expected to grow by almost 70% between 2013 and 2018, making it the world’s second largest market after North America. The number of cruise passengers originating from China rose by 79% between 2012 and 2014, according to Cruise Lines International Association.

Asia’s cruise industry as a whole is set for a record-breaking year in 2015 following years of double-digit growth, with the number of Asians taking cruise trips reaching 1.4 million last year. Carnival is well-placed to benefit from this growth as it has 23 ships in Asia and is planning to add a further nine ships in the region over the next three years.

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Global cruise demand has risen by 77% in the last decade. ‘This is likely to continue due to ageing demographics in the developed market, lower fuel prices, more fuel efficient ships and the relatively untapped Chinese market,’ says Canaccord Genuity analyst Simon McGarry.

Growth: HIGH

Carnival is increasing its presence in the rapidly growing Chinese market.

Risk: MEDIUM

It is exposed to fuel price and currency fluctuations.

Quality: MEDIUM

Double-digit earnings growth going into 2017.

Lower fuel costs

Despite foreign exchange headwinds Carnival’s first quarter results were ahead of expectations. It swung to a net profit of $49 million from a loss of $20 million a year earlier, helped by a 38% drop in the price of fuel and higher onboard spending. Carnival released its second quarter results after Shares went to press but fuel costs were expected to boost operating margins by around 3%, helping to stem the steady decline from 25% to 13% over the last decade.

Carnival is trading on 18.6 times 2015 earnings but this is justified by forecast earnings per share growth of 28% next year. It still trades at a 12% discount to the FTSE 350 hotels, restaurants and leisure industry.

McGarry says one concern is the deterioration in earnings quality. From 2000 to 2011 reported earnings averaged 100% of underlying earnings but after the Costa Concordia disaster this fell to between 83% and 95%.

Double-digit roic

Carnival says it can drive yield growth of 3% to 4% over the next few years and achieve a double-digit return on invested capital (ROIC). Numis is forecasting pre-tax profit of $2.16 billion in 2015, an increase of 42.9% year-on-year.

Carnival (CCL) £32.99

Stop loss: £26.39

Market value: £6.8 billion

Prospective PE Dec 2015: 18.6

Prospective PE Dec 2016: 13.6

Prospective dividend yield: 2.2%

Bid/offer spread: 0.09%

Analyst price target: £35.00*

*Berenberg, 19 June 2015