China's ZTE Q1 net income trails forecasts

China's ZTE Corp (0763.HK)000063.SZ, the world's fifth-biggest telecommunications equipment maker, reported weaker-than-expected first-quarter profit following sluggish telecoms spending and price wars.

ZTE and its domestic rival Huawei Technologies Co Ltd HWT.UL have cut prices to grab market share in a slowing global telecoms equipment market, a strategy that has hit profitability, analysts said.

To boost margins, the Shenzhen-based telecoms equipment vendors are now aiming to offer value-added services, focus on network upgrading projects and increase sales of consumer devices such as smartphones and tablet PCs, they said.

Unaudited net income was 150.87 million yuan ($23.92 million) in January to March, compared with 127.29 million yuan a year earlier, ZTE said on Wednesday. That missed an average forecast of 183 million yuan by three analysts polled by Reuters.

Earlier this week, Huawei reported a 53 percent decline in its 2011 profit, even as sales grew 11.7 percent. ZTE said in March that full-year profit had dropped by a third.

"Western vendors would welcome Huawei and ZTE putting greater emphasis on margins," Daryl Schoolar, principal analyst for network infrastructure at research firm Ovum, said in Shenzhen.

"Probably one of the biggest complaints I get when talking to their competitors is that they win business on low prices on very favorable financial terms backed by Chinese banks."

Chinese telecoms equipment makers have received support from policy banks, such as China Development Bank CHDB.UL, in the form of low interest rate loans for network infrastructure projects in emerging economies, according to analysts.

They have also relied on preferential taxes instead of focusing on boosting profitability, analysts say.

Huawei is the world's No.2 vendor, with revenue just a tad behind Sweden's Ericsson (ERICb.ST). Alcatel-Lucent SA (ALUA.PA), Nokia Siemens Networks NOKI.UL and ZTE come next.

In 2011, Huawei's overall gross profit margin fell 6.5 percentage points to 37.5 percent, while ZTE saw a drop of 2.03 percentage points to 30.26 percent with handset margins taking the biggest hit. ZTE did not specify the company's margins in its unaudited first-quarter results.

"It will be better for the overall industry if vendors compete more on services and product development, rather than prices," said George Sun, ZTE's vice president of corporate strategy. ($1 = 6.3073 Chinese yuan)

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