China cruise resumption an attractive medium-term catalyst for Royal Caribbean and Carnival Corp - Wells Fargo

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By Sam Boughedda

In a research note Tuesday, Wells Fargo analysts said that China's eventual reopening could be worth $6 per share to Royal Caribbean (NYSE:RCL) and $1 per share to Carnival Corp. (NYSE:CCL).

They explained that with China travel resuming and the cruise industry recovering, they believe the eventual resumption of China cruise operations presents an "attractive medium-term catalyst" for RCL and CCL.

"On RCL's Feb. 7th earnings call, management noted China could reopen in late 2023/2024 as two major impediments—a technical ban on China cruising and Japan testing restrictions—should ease in 1H23. China would be incremental to RCL's FY25 $100+ EBITDA/APCD target," they wrote.

Providing data, the Wells Fargo analysts stated that in 2019, China accounted for 4% of capacity for CCL and 6% for RCL, with the country one of the top four markets for sourcing globally, with 1.9 million cruise passengers, behind the U.S., Germany, and the U.K.

"We estimate RCL and CCL reallocating pre-COVID levels of capacity back to China could be worth $6/sh for RCL and $1/sh for CCL," argued the analysts. "Spreading capacity over a greater number of source markets should have a positive effect on RCL/CCL yields, and we do not believe ship opex for China itineraries was materially different from non-China itineraries. Assuming RCL and CCL allocate 6% and 4% of their capacity to China, ex-China supply/demand should be better balanced."