ZTE Corp, China's second-largest telecommunications equipment maker, said on Monday that it expects to reverse a decline in handset profit margins this year and forecasts global sales of its smartphones to more than double from 15 million sold in 2011.

The world's No.4 handset maker and bigger crosstown rival Huawei Technologies Co Ltd have diversified from selling telecom network gear, where growth has slowed, into consumer electronic devices such as smartphones and tablet PCs.

As handsets contribute more to overall revenue, it will affect our profit margins. In 2012, our aim is to increase handset margins, Executive Director He Shiyou told reporters on the sidelines of the company's annual analyst conference in Shenzhen, where the company is based.

Going forward, we would like to stick with the number of models we have and keep upgrading them, He said, adding that the company forecast its global tablet PC sales to double this year.

ZTE plans to focus on its star handphone models such as the Blade and Skate and continue upgrading them rather than unveil additional new models.

ZTE, the world's No.5 telecoms equipment maker, posted a drop in October-December net profit to 991 million yuan ($157 million), down 48 percent from 1.89 billion yuan a year earlier. [ID:nL3E8ES6QG]. It reported operating revenue of 86.25 billion yuan ($13.7 billion) for 2011.

It has been faring better than Huawei Technologies in mobile phone sales, but lagged its competitor in the mainstay telecom equipment business. Both companies have diversified into consumer devices such as dongles, smartphones and tablet PCs as part of a search for new revenue drivers as growth in the telecom equipment sector stagnates, analysts say.

ZTE and Huawei have had trouble breaking into the U.S. market for telecom equipment sales as the U.S. government has reservations related to cyber security issues, although handset sales have been fairly strong.

Our channel checks indicate supply chain optimization and robust growth in U.S. handset shipment with higher margins to positively impact handset margins from Q1 2012, Jefferies analyst Cynthia Meng said in a report dated April 19.

Outside of its home market China, ZTE has successfully expanded into emerging markets and Europe, although the company said last month that it was scaling back operations in Iran because of sanctions over the country's nuclear-development program.

ZTE's Hong Kong-listed shares were up 1.6 percent on Monday morning, outpacing a 0.7 percent fall in the broader Hong Kong Index.

(Editing by Anne Marie Roantree and Chris Lewis)

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