ZTE, the world's No.4 handset producer and fifth-ranked telecoms gear maker, has fared better than crosstown rival Huawei Technologies Co Ltd in mobile sales, but lags its local peer in its mainstay telecom equipment business.

Both have diversified into consumer gadgets, selling dongles, smartphones and tablets to drive revenue growth as the telecom equipment sector stagnates, and both have met stubborn resistance in the United States where cyber-security issues have kept the telecom equipment market largely off-limits.

ZTE, valued at $9.3 billion, has expanded its footprint in emerging markets and Europe, though it said last month it was scaling back operations in Iran due to sanctions over Tehran's nuclear development program.

ZTE plans to focus on its Blade and Skate handphone models, upgrading them rather than unveiling new models, and expects to also double its tablet PC sales this year, said executive director He Shiyou on Monday.

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

Gross profit margin for ZTE's consumer gadgets division, which comprises mainly handset sales, was 15.18 percent in 2011, down 3.81 percentage points from a year earlier.

"We spoke to components suppliers recently and it seems that handset makers such as ZTE won't be able to reduce their raw material costs," said Nomura Securities analyst Huang Leping. "For ZTE to improve its profit margins, they will have to raise their average selling prices and to do so will largely depend on their sales in the North American and Japanese markets."

Having cut its teeth making cheap-end smartphones for other operators to slap their brand names on, ZTE, founded in 1985 as Zhongxingxin Telecommunication Equipment Corp, is moving into the high-end market itself to take on Apple's iPhone and Samsung Electronics' Galaxy.

But there are significant roadblocks, not least that it's a Chinese firm and the market it covets is brutal and expensive.

"The (higher) value part of the market is driven by brand and that's the part a company like ZTE needs to focus on," said Adam Leach, a London-based analyst at Ovum, noting that margins are much higher at the top-end of the market.

"People who buy Apple and Samsung have greater brand awareness so they might not take chances with a little-known brand, especially one from China," said Teck-Zhung Wong, a Beijing-based analyst for research firm IDC.

"No one really knows ZTE outside China."

BRANDING RULES

As a relative newcomer to smartphones, ZTE lacks the brand cachet that bigger global rivals enjoy.

"It's difficult to get that top slot in consumers' minds," said Ovum's Leach, estimating it takes 3-5 years of sustained spending on marketing, as well as investment in product design, to achieve strong branding. "ZTE is in a good position, but there's no guarantee of success," he said.

But there are some promising signs.

Gao Jinwen is a self-confessed smartphone addict and, after years of using foreign-branded models, the 28-year-old post-graduate student has ditched his sputtering Motorola and switched to a ZTE Blade that he bought for just 800 yuan ($130).

"It's much better than I expected," he said. "I reckon this could overturn the old stereotype of China-made smartphones."

Launched two years ago, the Blade has sold more than 8 million as ZTE pushed into the smartphone mass-market.

As a next great leap, ZTE caused a stir at this year's Mobile World Congress in Barcelona with the launch of its Era smartphone, boasting technical specifications matching those of international rivals.

"With the Era ... and quad-core (processor) tablets, ZTE has very clearly decided to step out and move to high-spec, high-performance, high-profile phones," said IDC's Wong.

In February, ZTE launched its first tablet in the United States with partner Sprint Nextel. The Android-based Optik tablet, which has a unique rubberized grip to stop it slipping, can be bought for $100 with a contract and $350 without, making it far cheaper than the latest iPad that costs at least $499.

ZTE is expected to report its January-March earnings on Wednesday, with three analysts on average forecasting a 10 percent increase in net profit to 183 million yuan ($29 million) from 166 million yuan a year earlier.

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

Unlisted Huawei, founded by CEO Ren Zhengfei in 1987, is due to release its 2011 earnings results later on Monday.

ZTE's Hong Kong-listed shares rose more than 2 percent on Monday, while the main Hang Seng Index was down 0.6 percent. ZTE shares touched a 7-month low last Thursday having lost more than a fifth of their value in 5 weeks, but the stock has now gained almost 6 percent in three straight sessions.

($1 = 6.3085 Chinese yuan)

(Additional reporting by Melanie Lee; Editing by Anne Marie Roantree and Ian Geoghegan)

• A Permanent Economic Emergency