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Chinese gaming and social media group Tencent Holdings Ltd on Wednesday reported a market-beating 26% jump in quarterly sales, helped in part by a surge in revenue from its online gaming business.

Revenue rose to 133.67 billion yuan ($20.5 billion) in the quarter ended December, versus market expectations of 132.19 billion yuan, based on data from Refinitiv.

Tencent, which has benefited from a surge in paying users for video games in China and international markets, said online games revenue rose 29% to 39.1 billion yuan.

Profit rose 175% in the same period to 59.3 billion yuan, largely thanks to fair-value gains in companies Tencent has invested in, and sales of stakes.

Tencent's two hit games, Honor of Kings and PUBG Mobile, continued to top the rank in China and internationally, respectively, in this quarter.

However, Tencent is facing mounting competition from ByteDance, the owner of TikTok, and the similar short-video platform Douyin, which have made sizeable inroads into the video games business.

ByteDance outbid Tencent last week to acquire Shanghai-based gaming studio Moonton Technology, which is most famous for its Southeast Asia sensation Mobile Legends.

Tencent is also locked in litigation battles with ByteDance, which has alleged that Tencent has engaged in monopolistic behaviour. Tencent has alleged that ByteDance "illegally obtains WeChat users' personal information".

REGULATORY CRACKDOWN

China's tech giants have been faced this year by an antitrust crackdown by authorities, which analysts fear could target other internet groups after first focusing on billionaire Jack Ma's Alibaba business empire.

Tencent's founder Pony Ma met with China's antitrust watchdog officials this month to discuss compliance at his group, Reuters has reported, citing two people with direct knowledge of the matter.

In a media call post-results, Tencent president Martin Lau said during the meeting, which was voluntary, "we have discussion about a broad range of topics, and the main focus is actually on creating a healthy environment for innovation to happen in China."

China has issued new rules to regulate financial holding companies, and directed Alibaba-affiliate Ant Group turn itself into a financial holding company with capital restrictions and other requirements.

Asked about the prospect of creating a financial holding company for Tencent, Lau said the financial holding company corporate structure provides an operating framework and is neutral in nature.

"As we understand, turning into a financial holding company should involve organisational change but does not impact businesses," he said.

Pony Ma, who attended the call, said Tencent was working with regulators on compliance, including combing through some of its previous investments, while James Mitchell, chief strategy officer, said the company will stick with its normal practice of acquiring minority stakes in Chinese startups.