In this file photo taken on Aug 7, 2020, the headquarters of Tencent are seen in Beijing. (GREG BAKER / AFP)

Tencent Holdings reported its first quarterly sales decline since it went public in 2004 as the COVID-battered Chinese economy and sluggish domestic gaming sales have walloped the internet giant’s business on multiple fronts.

The Shenzhen-based company’s revenue slid to 134 billion yuan ($19.8 billion) in the second quarter, down 3 percent from 138.3 billion yuan a year ago. 

Net profit plunged 56 percent year-on-year to 18.6 billion yuan for the three months ended June.

The slowdown adds to the challenges facing Tencent — an emblem of China’s fast-growing and quickly innovating new economy — as it grapples with the slowdown in China’s economy as well as with stringent regulatory scrutiny of the tech sector.

Tencent, which gains much of its income from its gaming titles such as Honor of Kings and PUBG Mobile, saw its domestic games sales decrease by 1 percent year-on-year to 31.8 billion yuan in the second quarter

China’s gross domestic product grew merely 0.4 percent year-on-year in the second quarter, likely to result in slower consumer spending and a slash in advertising demand.

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Tencent, which gains much of its income from its gaming titles such as Honor of Kings and PUBG Mobile, saw its domestic games sales decrease by 1 percent year-on-year to 31.8 billion yuan in the second quarter. Meanwhile, income from the company’s games sales in the international market fell the same percentage amount to 10.7 billion yuan.

Continuing uncertainties in regulatory approval for new video game licenses have also been strong headwinds for the company. Though regulators resumed approving new games in April, Tencent so far this year has not had a single title approved. 

Tencent said its online advertising revenue decreased by 18 percent to 18.6 billion yuan for the period on a year-on-year basis, reflecting notable weakness in the categories including internet services, education and finance sectors.

It said it expects the video accounts’ in-feed advertisements on the country’s most-used social media platform Weixin to become a key driver for the segment’s market expansion and profitability.

Meanwhile, revenues from the company’s fintech and business services rose by 1 percent year-on-year, relatively slower than in prior quarters as the resurgence of COVID-19 cases temporarily impacted commercial payment activities in April and May.

On Tuesday, Reuters reported that Tencent is planning to placate domestic regulators by divesting most of its $24 billion stake in food delivery giant Meituan, citing four sources with knowledge of the matter.

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This planned stake sale came against the backdrop of government moves to rein in the power of technology giants through tighter scrutiny. Last month, China’s antitrust regulator State Administration for Market Regulation released a list of 28 deals that violated the country’s anti-monopoly rules, 12 of which involved Tencent.

Tencent nevertheless declined to comment on the divestment. Meituan did not respond to a request for comment.

The company’s share price edged up marginally on Wednesday, closing at HK$303.2 before the latest results were announced.

Linus Yip Sheung-chi, chief strategist at First Shanghai Securities, is bullish about the company’s growth prospects despite the company’s disappointing performance. 

He expects Tencent’s gaming business to get back on track and secure steady sales performance in the second half of the year, given the popularity of its flagship mobile games. Also, the company’s international gaming expansion could make up for the slowdown in its home market, while a recovery in advertising sales will largely depend on when the pandemic situation eases, Yip added.

“It’s not a surprise to see a giant company like Tencent see sedate growth after decades of rapid development,” said Yip. “Looking ahead, Tencent’s foray into financial technology and corporate services will remain a key growth engine.”

evanliu@chinadailyhk.com