(Yicai Global) Aug. 16 -- Tencent Holdings' shares fell 3 percent after the Chinese internet giantannounced the first decline in net profit in at least a decade, with poor performance in its gaming businessto 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, withanalysts 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 CNY18billion (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 initsgaming businesssputtered in the second quarter, withonline game climbing just 6 percent to CNY25.2billion. 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 quarterbeforeto CNY17.6 billion, while computer games revenue fell 5 percent from a year earlier and 8 percent from the previous quarter to CNY13billion.

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

Personal computergames have also been hit amid slowinggrowth of mobile games.Authorities orderedTencent to remove the game Monster Hunter World from its WeGame platformon Aug. 13only five days after its debut, as some of the game's contentoffends againstpolicy and regulatory requirements.This bolt from the bluewas a big blow to Tencent and alsoof concernto 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, anannualrise of 5 percent,showsareport on China's first-half gaming sector thatthe 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 13percent from a year earlier, butthis wasa big dropfromlast 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 percentto CNY9.4billion, driven by growth inits messaging and third-party paymentWeChat app,social mediaWeChatmomentsapp, mini apps, mobile advertising alliance andApple iWatch rivalQQ Watch.

Tencent's core business, communications, islikewisehitting growth ceilings. WeChat's monthly active accounts had reachedover1billionas of June 30, up10percent from a year earlier and 1.7 percent from a month earlier. Tencent'sinstantmessagingsoftwareQQ had 800 million monthly active users, down 5.5 percent from the previous year.

The pace ofthe company's investment is also slowing. Tencent spentCNY25.5billion in mergers and acquisitions in the second quarter, down from CNY54 billion inthe first quarter, per the report.

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

Editor: Ben Armour