Macao gaming stocks sold off sharply yesterday after Hong Kong’s Hang Seng Index resumed trading following its Christmas break last week. The sector pullback ranged from two to 17 percent, with losses led by MGM China after Morgan Stanley trimmed the company’s earnings before interest, taxes, depreciation, and amortisation (EBITDA) forecast by seven percent for both 2026 and 2027 due to higher royalty payments to its parent company, MGM Resorts. The investment house subsequently lowered the company’s target price and downgraded the stock to “equal weight.”
According to an announcement filed at the Hong Kong Exchange, MGM China will increase its royalty payments to 3.5 percent of its consolidated net monthly revenue, raising it from the 1.75 percent, which it has used since listing. Morgan Stanley estimates the new royalty is expected to cost HK$1.2 billion compared to HK$600 million from 2025, representing a 5 percent contraction in EBITDA in 2026 and compress margins by 220 basis points.
[See more: MGM China announces executive restructure as president Hubert Wang departs]
The stock price correction pulls MGM China’s equity valuation back to its summer levels, though maintains its positive year to date returns. The change is roughly 15 percent of its corporate EBITDA, Morgan Stanley writes, double what is has been between 2023 and 2025, and significantly higher than its peers, adding that while the company has seen its market share rise consistently in the past three years, those gains may have peaked
While license fees are standard practice across numerous industries, the decision to raise the percentage midway through the contract stands out, the analysts noted. In the company’s disclosure, the decision to raise the royalty payments “provides the MGM China Group with certainty and allows it to plan and implement its business strategy on a longer-term basis,” adding that “having regard to the extended use of the Subject Marks in the Company’s hospitality business, the proposed increase in license fees is in line with market comparables.”
Impact on Macao gaming stocks
Besides MGM China, Sands China and Wynn Macau also pay royalties to their US parents, which could support higher market valuations for those holdings relative to their Hong Kong-listed subsidiaries, Morgan Stanley remarks. Despite the upgrade to an “overweight” rating and higher target price, shares in Galaxy Entertainment were sold off on Monday. The stock upgrade was driven by the absence of royalty payments, which translates into higher margins. Supported by its net cash position, the company is also well‑placed to increase its dividend payout as capacity additions come online, according to the analyst report.
[See more: Currency appreciation and dividends to boost Macao gaming stocks next year, analysts say]
Morgan Stanley maintains its upbeat outlook on the gaming sector, pencilling in gross gaming revenue growth of 17 percent for the quarter, which should translate into 15 percent EBITDA growth over the three‑month period. Even though the sector trades at a discount to its long‑term valuation, without meaningful evidence of margin improvement, a stock rerating may be difficult despite the recovery in demand.
