MGM China, a gaming company in Macau, saw a significant drop in stock price immediately after the Christmas holiday, due to its parent company MGM International substantially increasing brand fees, leading the market to vote with their feet.
<h4>Key Points:</h4>
<ul>
<li>MGM China's brand fee percentage has doubled to 3.5%</li>
<li>The company's market value evaporated by over HKD 10 billion in a single day</li>
</ul>
Liu Zhiheng
What is &#34;losing big for small gains&#34;? The gaming company MGM China Holdings Limited (2282.HK) (hereinafter referred to as MGM) perfectly demonstrated this through its parent company MGM International (MGM.US) (hereinafter referred to as MGM).
On Christmas Eve last year, MGM suddenly announced that the brand contract issued by MGM was set to expire at the end of last year, and a new brand agreement had been signed, effective January 1 of this year.
Renewing the contract was originally quite normal, but the issue was that the brand fees charged by MGM in this new contract increased from the previous 1.75% of monthly gross revenue to a doubled 3.5%, for a maximum period of no more than 20 years. The company estimates that the upper limit of brand fees this year will be approximately USD 188.3 million.
Morgan Stanley expects that MGM will have to pay HKD 1.2 billion in brand fees this year, doubling from HKD 600 million in 2025. Due to the increase in fees, the company's earnings before interest, taxes, depreciation, and amortization (EBITDA) may decline by 5% year-on-year, and the firm downgraded its rating to &#34;in line with the market,&#34; lowering the target price from HKD 19 to HKD 16.5.
<h4>Continuing to Win the Gaming License</h4>
Before this incident, MGM had been favored by investment banks, especially with the Macau government issuing new gaming licenses, making MGM China a big winner.
When the Macau government issued new gaming licenses in 2022, restructuring the gaming tables of various companies, many gaming companies saw a sharp reduction in the number of tables. Sands China (1928.HK) and Galaxy Entertainment (0027.HK) were spared from reductions, while Amax (0880.HK) became a big loser, with a 29% reduction to 1,250 tables, and Melco (0200.HK) saw a 17.8% decrease to 750 tables, while Wynn (1128.HK) had to reduce by 10.7% to 570 tables. Only MGM's number of tables increased significantly from 552 to 750, a 36% rise.
At the same time, under the new gaming regulations, the mass market has become a key driver of gaming company revenues, and success in the mass market is based on volume; having more gaming tables provides a competitive advantage, and MGM benefited the most from the increase in tables.
For this reason, the market has valued MGM highly in recent years. Excluding the sharp drop last Monday, based on the closing prices of the six gaming companies on Christmas Eve last year, MGM had the highest increase over the past year, rising by 90% from its low, while the other five gaming companies saw increases ranging from 25% to 89%.
Meanwhile, the gaming environment in Macau continues to improve. Although the monthly gross gaming revenue saw a significant slowdown in year-on-year growth in the first half of last year, the situation reversed starting in June, with double-digit growth in monthly gross revenue, including six months where gross revenue exceeded MOP 20 billion
<h4>Stock Price Plummets, Not Worth the Loss</h4>
Looking again, the company earned HKD 2.386 billion in its mid-year results last year, which annualizes to about HKD 4.8 billion. In other words, when the brand fee increases by HKD 600 million, it will undoubtedly impact the company's profitability.
However, considering the company's annual profit of nearly HKD 5 billion, the actual impact on the fundamentals is not too significant. But this sudden increase will certainly have a negative psychological effect on investors.
In fact, on December 29th last year, when the Hong Kong stock market opened, MGM's stock price plummeted, closing at HKD 12.91, down 17% for the day, with trading volume increasing 8 to 9 times to HKD 610 million. The company's market value dropped to HKD 49 billion, evaporating HKD 10.2 billion in a single day.
MGM's increase in brand fees seems to have taken a wrong step. Although it can increase revenue by hundreds of millions of HKD each year, MGM lost over HKD 10 billion in market value in just one day. If calculated based on MGM's 55.95% stake in MGM, the impairment in one day amounts to HKD 5.69 billion, making it seem not worth the loss.
<h4>Breaking Investors' Hearts</h4>
The most serious issue is that it has damaged investor confidence. Morgan Stanley pointed out that under the new brand fee, the cost is equivalent to 15.2% of MGM's EBITDA in 2026, around 14.1% for Wynn Macau, about 5% for Sands China, and zero for Galaxy Entertainment, making MGM the highest among its competitors.
The market has long had reservations about the brand fee. Since the gaming license was won by MGM, why is there still an additional so-called brand fee? Furthermore, MGM already holds over 50% of MGM's shares. Although Pansy Ho holds another 22% stake, even so, the brand fee should not exceed HKD 1 billion annually. Investors strongly disagree with this practice, feeling that the parent company is only focused on its own interests and has not adequately considered other shareholders.
Currently, MGM's extended price-to-earnings ratio is 11.4 times, while Galaxy and Wynn are at around 17 times, and Sands even reaches 22.4 times. As for Melco and SJM, they are still in a loss situation. In comparison, MGM's valuation seems the most attractive. With the Macau gaming industry continuing to improve, it should have the potential to catch up; however, after this incident, its lower valuation compared to peers is not without reason, as the major shareholder prioritized personal interests, leading to a natural discount in the company's valuation

02282

MGM CHINA's stock price plummeted significantly due to its parent company MGM International's substantial increase in brand fees, resulting in a market value loss of over HKD 10 billion. The new brand agreement raises the brand fee from 1.75% to 3.5%, with an estimated cap on brand fees of approximately USD 188.3 million this year. Morgan Stanley expects brand fees to increase significantly, with EBITDA potentially declining by 5%, downgrading the rating to "in line with the market" and lowering the target price to HKD 16.5

BambooWorks

MGM CHINA

The parent company increased revenue from licensing fees but suffered a significant loss, causing MGM China's stock price to plummet and its market value to decrease by 10 billion