(Yicai Global) Aug. 16 -- Tencent Holdings' shares fell 3 percent after the Chinese internet giant announced the first decline in net profit in at least a decade, with poor performance in its gaming business to blame.

Tencent's stock [HKG:0700] ended trading in Hong Kong today at HKD325.80 (USD41.51), after earlier dropping as much as 5 percent. The Shenzhen-based company has lost more than 30 percent of its value since a high reached in January, with analysts attributing the stock bust to concerns about the firm's increasing reliance on its investment business. A drop in earnings hasn't helped.

Net profit fell 2 percent to CNY18 billion (USD2.61 billion) in the second quarter, from a year earlier, Tencent said in an earnings report released yesterday. That was below a market estimate for CNY19 billion. Revenue jumped 30 percent to CNY74 billion.

Growth in its gaming business sputtered in the second quarter, with online game climbing just 6 percent to CNY25.2 billion. That compared with the lowest growth rate of 26 percent in the previous four quarters. Of that, income from mobile games dropped 19 percent from the quarter before to CNY17.6 billion, while computer games revenue fell 5 percent from a year earlier and 8 percent from the previous quarter to CNY13 billion.

While mobile games such as King of Glory and PlayerUnknown's Battlegrounds, or PUBG, have generated considerable traffic for Tencent, King of Glory has started a downtrend after more than two years of growth. Its number of daily active users was 4.9 million in June, down nearly 20 percent from March, per a second-quarter mobile internet sector report by Shenzhen-based big data research startup Jiguang. PUBG, which Tencent has the rights for in China, has not yet been licensed to charge fees.

Personal computer games have also been hit amid slowing growth of mobile games. Authorities ordered Tencent to remove the game Monster Hunter World from its WeGame platform on Aug. 13 only five days after its debut, as some of the game's content offends against policy and regulatory requirements. This bolt from the blue was a big blow to Tencent and also of concern to investors. The PC version of PUBG has not yet been approved for sale.

Slowing Sectors

Actual sales revenue in the Chinese game market was CNY105 billion, an annual rise of 5 percent, shows a report on China's first-half gaming sector that the Work Committee for Game Publishing under the China Audio-Video and Digital Publishing Association released. Of that, the revenue from PC games was CNY31.5 billion, a first-time decline, while mobile game income rose 13 percent from a year earlier, but this was a big drop from last year's increase of nearly 50 percent. 

Revenue from Tencent's online advertising business grew 39 percent to CNY14 billion in the second quarter, from a year earlier. Social and other advertising revenues rose 55 percent to CNY9.4 billion, driven by growth in its messaging and third-party payment WeChat app, social media WeChat moments app, mini apps, mobile advertising alliance and Apple iWatch rival QQ Watch.

Tencent's core business, communications, is likewise hitting growth ceilings. WeChat's monthly active accounts had reached over 1 billion as of June 30, up 10 percent from a year earlier and 1.7 percent from a month earlier. Tencent's instant messaging software QQ had 800 million monthly active users, down 5.5 percent from the previous year.

The pace of the company's investment is also slowing. Tencent spent CNY25.5 billion in mergers and acquisitions in the second quarter, down from CNY54 billion in the first quarter, per the report.

Investments have also consumed large amounts of the firm's cash reserves. Tencent's net debt was CNY35.3 billion as of June 30, reflecting a monthly rise in payments on mergers and acquisitions and media content, as well as dividends, the report indicates. The firm registered free cash flow of CNY15.4 billion.

Editor: Ben Armour