Morgan Stanley downgrades MGM China, upgrades Galaxy on royalty impact

Morgan Stanley downgraded MGM China Holdings to “equal-weight” from “overweight”, while upgrading Galaxy Entertainment Group to “overweight,” warning that surging royalty payments will erode MGM’s earnings.

The moves came as the Hang Seng Index slipped and Macau’s casino sector suffered a broad pullback Monday, with shares posting losses ranging from about 2% to 17%.

The bank attributed the increase in royalties to parent MGM Resorts International.

MGM China filed an announcement with the Hong Kong Exchange, confirming it will raise royalties to 3.5% of consolidated net monthly revenue, up from 1.75% since its listing.

Morgan Stanley estimates this will cost HKD 1.2 billion annually, versus HKD 600 million in 2025, suggesting a 5% EBITDA contraction in 2026.

The bank said MGM China’s royalty burden will hit about 15% of EBITDA in 2026, more than double prior levels and far above peers. “The royalty payments are roughly 15 percent of corporate EBITDA… double what they had been in 2023–2025, and significantly higher than peers.” The bank added that this will compress margins by 220 basis points year-on-year.

Wynn Macau faces a similar hit, with royalties at 14% of EBITDA. JP Morgan states, “Wynn [Macau Ltd.’s] royalty payment has been the highest in the group since listing.”

The Morgan Stanley report noted that “leakage” is much less for Galaxy and Sands, making them more shareholder-friendly. Sands China pays about 5% of its EBITDA, while Galaxy and SJM Holdings pay none.

JP Morgan states Galaxy’s upgrade stems from zero royalties, a net cash balance sheet, and Phase 4 expansion with 1,500 suites. The firm also expects Galaxy to raise dividends.

Morgan Stanley remains bullish on Macau gaming overall, forecasting 17% gross gaming revenue growth this quarter, driving 15% EBITDA growth. The bank warned that without margin gains, stock rerating will remain difficult despite the demand recovery.