ZTE Says High-End Phones to Boost Margins as China Users Upgrade

ZTE Corp. (763), China’s second-largest maker of phone equipment, said new high-end smartphones will help widen margins after the company posted losses in two of the last three quarters.

“We expect healthy operations for ZTE for the whole year,” George Sun, vice president of corporate strategy at the Shenzhen-based company, said in a telephone interview today.

ZTE is poised to benefit as investment by China’s three carriers in network expansion and handset subsidies spur smartphone use in the world’s largest mobile-phone market. China has 1.15 billion wireless users, with about one quarter switching to high-speed networks at the end of March, leaving more than 860 million users who could upgrade to smartphones.

“There will be a large number of 2G subscribers migrating to 3G networks this year, or to the 4G network that will launch this year,” Ricky Lai, a Hong Kong-based analyst with Guotai Junan International Holdings Ltd., said by phone today. “The three telco operators are increasing handset subsidies to boost their subscriber growth.”

ZTE’s Hong Kong-traded shares fell 4 percent to close at HK$13.38. The stock has gained 2.5 percent this year, compared with the benchmark Hang Seng Index’s 1.2 percent advance.

‘On Track’

In January, ZTE said it plans to boost smartphone shipments 50 percent this year with a focus on high-end phones that run on fourth-generation, Long-Term Evolution, networks. ZTE’s smartphone shipments more than doubled to 35 million units last year, from 15.8 million units in 2011.

ZTE is “on track” to achieve that shipment target and the market response to new flagship devices like the Grand S quad-core smartphone is “pretty positive,” Sun said.

“This year we can expect some growth at the high-end,” Sun said. “Our margin has come mainly from the mid-end. Now the high-end is making more contribution. The low-end contributes very little margin. The low-end contributes a lot of volume and revenue but doesn’t contribute a lot of margin.”

Sun didn’t provide any detailed figures on margins for the company’s smartphones.

To contact Bloomberg News staff for this story: Edmond Lococo in Beijing at elococo@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net

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