MGM China Holdings Ltd., a key player in Macao's gaming sector, saw its stock price plunge dramatically following an announcement that its parent company, MGM Resorts International, had doubled the percentage fee charged for the rights to use the MGM brand name. Previously set at 1.75% of consolidated net monthly revenue, the licensing fee is now 3.5%, effective from the start of this year, and the agreement is structured for a term that may extend up to 20 years.
This sudden revision in the licensing fees, disclosed after the Hong Kong stock market closed on Christmas Eve, took investors by surprise and dealt a severe blow to MGM China's market capitalization. The company's board has decided to cap the amount payable for the current year at HK$1.47 billion (approximately $188.3 million), but the increase marks a substantial rise from the previous rates.
Financial analysts, such as Morgan Stanley, estimate that the increased licensing fees will amount to HK$1.2 billion ($154 million) for 2026, effectively doubling the licensing fee expense from the HK$600 million paid in the prior year. The higher costs are expected to compress MGM China's earnings before interest, taxes, depreciation, and amortization (EBITDA) by roughly 5% year-over-year. Reflecting these concerns, Morgan Stanley downgraded MGM China's rating from "overweight" to "equal-weight" and lowered its target price from HK$19 to HK$16.50.
The escalating fees occurred against a backdrop of MGM China previously enjoying favorable developments. In 2022, Macao's government issued new gambling licenses with a reallocation of gaming table holdings among casino operators. MGM China was the only beneficiary of this reshuffling, receiving a 36% increase in licensed gaming tables, from 552 to 750, while competitors faced substantial reductions. This advantage positioned MGM China strongly in the mass gaming market segment, which emphasizes volume-based growth over the traditionally lucrative VIP rooms.
Prior to the licensing fee announcement, investor enthusiasm had driven MGM China's stock price to increase by up to 90% from its prior year's low, outpacing gains by other Macao casino operators. The gaming sector in Macao also experienced a positive trajectory, with gross gaming revenue (GGR) growth rates accelerating into double-digits in the latter half of last year and monthly totals frequently exceeding 20 billion patacas (around $2.5 billion).
Despite these market tailwinds, the licensing fee adjustment is expected to have a meaningful impact on MGM China's profitability. The company reported a profit of HK$2.39 billion in the first half of the prior year, which annualizes to approximately HK$4.8 billion. An increase of HK$600 million in licensing fees, representing about one-eighth of that profit, constitutes a significant expense burden.
The market reacted swiftly and negatively to the fee hike. On the first trading day following the announcement, December 29, MGM China's share price declined by nearly 17% to close at HK$12.91, with trading volumes reaching nearly nine times the daily average. This led to a market value contraction of approximately HK$10.2 billion, down to HK$49 billion.
The decision by MGM Resorts to more than double the licensing fee appears to have been a strategic miscalculation. While the parent is poised to gain close to $100 million in additional annual revenue from the increased fees, its majority stake of 55.95% in MGM China means it internalizes only a portion of the losses caused by the resultant stock price decline. The one-day diminution in MGM China's market capitalization translates to an estimated HK$5.69 billion loss for MGM Resorts, significantly outweighing the anticipated additional fee income during the early years of the new contract.
Investor confidence suffered notably from the fee increase. Morgan Stanley highlights that, post-hike, licensing costs will account for roughly 15.2% of MGM China's projected EBITDA in 2026, a higher ratio than peers such as Wynn Macau (14.1%), Sands China (5%), and Galaxy Entertainment (0%). This positions MGM China as the most heavily burdened by such fees among key operators in the market.
These concerns extend beyond financial metrics to corporate governance and shareholder relations. Observers have questioned the justification for the fee, noting that MGM Resorts secured the gaming concession itself and already holds a majority ownership stake in MGM China. The imposition of a licensing fee exceeding HK$1 billion annually raises questions about the prioritization of parent company interests over minority shareholders, contributing to the negative investor sentiment.
Currently, MGM China's valuation reflects these challenges. The company trades at a trailing price-to-earnings (P/E) ratio of approximately 11.4 times, noticeably lower than peers such as Galaxy Entertainment and Wynn Macau (17 times) and substantially below Sands China, which stands at 22.4 times. Meanwhile, competitors SJM and Melco International are struggling with unprofitable earnings.
From a relative perspective, MGM China's current undervaluation compared to its peers might present opportunities should Macao's gaming sector continue its recovery. However, the abrupt licensing fee increase serves as a stark reminder of the risks inherent when controlling shareholders exercise terms that may erode minority investor confidence and shareholder value. Such dynamics may impede the near-term rebound of MGM China's stock price as the market evaluates the broader implications of this corporate governance decision.