Parental love gone amok? MGM China feels the pain of licensing fee hike

The Macao gaming operator’s shares plunged after being saddled with a major increase for rights to use the name of its parent, MGM Resorts

Key Takeaways:

• MGM China said its licensing fee rate for rights the MGM Resorts name doubled to 3.5% of its monthly revenue starting this year
• The Macao casino operator’s market value plunged by over $1.3 billion in a single day after the announcement

By Lau Chi Hang

Its business is dealing in money at its many casinos worldwide. But MGM Resorts International (MGM.US) was behaving more like a Scrooge around the holidays late last month, as it became a poster child for the adage “penny wise and pound foolish.”

After the Hong Kong market closed on Christmas Eve, the company’s Hong Kong-listed unit, MGM China Holdings Ltd. (2282.HK), abruptly gave its shareholders some early Christmas coal. The Macao casino operator informed them that a branding agreement with its Las Vegas-based parent was expiring at year-end, and a new long term deal would take effect on Jan. 1.

While such contract renewals are routine matters, the devil was in the details this time. Simply put, the licensing fee MGM charges its Asian offspring in the new contract doubled from 1.75% of consolidated net monthly revenue to 3.5%, effective for up to 20 years. MGM China said its own board resolved to cap this year’s license fee at $188.3 million.

Morgan Stanley forecast that MGM China will pay HK$1.2 billion ($154 million) in licensing fees this year, double the HK$600 million it paid in 2025. That substantial increase could drag down the company’s earnings before interest, taxes, depreciation, and amortization (EBITDA) by about 5% year-on-year, it added. As a result, it downgraded its rating on MGM China to “equal-weight” from “overweight,” and reduced its target price from HK$19 to HK$16.50.

Gaming license renewal beneficiary

Before the Christmas surprise, MGM China had become an investor darling after the Macao government issued new gambling licenses that dealt the company a strong hand over its rivals.

The new licenses in 2022 included a major reshuffle of gaming table allocations for the city’s various operators, with many receiving major reductions. The top loser was SJM (0880.HK), whose count was slashed by 29% to 1,250 tables. Melco Resorts (MLCO.US), a subsidiary of Melco International (0200.HK), saw its total cut by 17.8% to 750 tables, while Wynn Macau (1128.HK) also experienced a 10.7% cut to 570 tables. Sands China (1928.HK) and Galaxy Entertainment (0027.HK) came up neutral and were spared any reductions. Only MGM China emerged as a winner, as the government raised its count by 36%, from 552 to 750 tables.

At the same time the new gaming regulations have shifted the focus for casinos away from VIP rooms that were their traditional big money spinners, and towards the mass gaming floor to drive revenue growth. Since the mass market segment operates on a volume-based model, operators holding the most gaming table licenses automatically have a distinct competitive advantage. Accordingly, MGM China became the primary beneficiary of the shifting focus due to its substantial increase in gaming tables.

Those advantages sent investors diving in MGM China’s stock. Before a steep decline the next trading day after the Christmas Eve announcement, MGM China’s stock had risen up to 90% from its low for the last year. By comparison, stock gains for the remaining five license holders ranged between 25% and 89%.

An improving gaming environment in Macao has also lifted the entire group. After year-on-year growth rates for monthly gross gaming revenue (GGR) slowed significantly in the first half of last year, the trend began to reverse in June. As a result, monthly growth rates rose into double-digit territory in the second half, with the monthly total topping 20 billion patacas ($2.5 billion) in six separate months.

Stock plunges on fee hike

MGM China reported a profit of HK$2.39 billion in the first half of last year, equating to about HK$4.8 billion on an annualized basis. Accordingly, an increase of HK$600 million in money for licensing fees – equal to one-eighth of the profit – will have a major impact on the company’s profitability.

While MGM China will undoubtedly survive the blow with relatively limited impact, the abrupt nature of the increase left a bad taste in investors’ mouths.

When the Hong Kong market opened on Dec. 29, the first trading day after the announcement, MGM China’s stock plunged sharply to close down 17% at HK$12.91 for the day, on trading volume that was eight to nine times the daily average. That shaved about HK$10.2 billion from its market value, which fell to HK$49 billion.

MGM Resorts’ decision to increase its offspring’s licensing fee looks a bit like a misstep. While the U.S. company stands to gain nearly $100 million in additional revenue annually, the immediate consequence was a much greater hit to MGM China’s market value in a single day. Based on MGM Resorts’ 55.95% stake in MGM China, this translates to a one-day loss of HK$5.69 billion for the parent, far more than it will gain from the increased fee income over the first few years.

Dented investor confidence

The biggest negative fallout from the fee hike is damage to investor confidence. Morgan Stanley points out that under the new structure, licensing costs represent about 15.2% of MGM China’s projected 2026 EBITDA. This compares to around 14.1% for Wynn Macau, approximately 5% for Sands China, and zero for Galaxy Entertainment. Consequently, MGM China is bearing the highest relative burden for that metric among its peers.

Investors have previously expressed reservations over the licensing fee. The fundamental question arises: since the gaming concession itself was secured by MGM Resorts, why impose an additional licensing fee? Furthermore, the parent already holds a majority stake in MGM China, making a license fee exceeding HK$1 billion annually seem excessive.

Investors in MGM China clearly don’t like this approach, believing the parent is prioritizing its own interests without adequately considering minority shareholders.

Following the selloff, MGM China currently trades at a trailing price-to-earnings (P/E) ratio of 11.4 times, below the 17 times for Galaxy Entertainment and Wynn Macao, and just half the 22.4 times for Sands China. SJM and Melco International are both losing money.

Comparatively speaking, MGM China’s current valuation looks the most attractive among its peers, implying potential upside as Macao’s gaming industry continues to improve. But the sudden fee hike shows the lower valuation may not be completely unfounded. The reason is straightforward: when a controlling shareholder prioritizes its own interests over minority investors, the company’s valuation will inevitably suffer.

Such a shifting perception could make a near-term recovery for MGM China’s share price challenging, as investors continue to smart from this unexpected piece of Christmas coal.

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