China's Huawei posts flat profit growth amid tough battle with rivals

HONG KONG (Reuters) - Chinese telecom equipment and smartphone maker Huawei Technologies Co Ltd [HWT.UL] on Friday said annual profit growth was nearly flat, its slowest pace in five years, as it ramped up spending to boost market share amid fierce competition.

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Strong competition in China’s smartphone market from previously little-known domestic rivals OPPO and Vivo cost Shenzhen-based Huawei its top spot as the biggest vendor in the domestic market last year.

“Only revenue growth and no profit growth will not be tolerated,” said Huawei rotating Chief Executive Eric Xu.

Huawei, the world's No. 3 smartphone maker behind Apple Inc AAPL.O and Samsung Electronics Co Ltd 005930.KS, said 2016 net profit edged up just 0.4 percent to 37.1 billion yuan ($5.3 billion).

Profits took a hit after Huawei’s consumer business spent an additional 4.9 billion yuan in part on branding, while it continued to expand its smartphone business, which is less lucrative than its telecom equipment business.

In February, Reuters reported that internal memos highlighted intense pressure to improve earnings and efficiency and a smartphone division head said the flagship unit had missed internal profit targets.

Global revenue climbed 32 percent to 521.6 billion yuan, slightly slower than 35 percent growth a year earlier, the company said.

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Xu declined to elaborate on goals for its consumer business but said keeping a net profit margin of around 7 percent for the group overall “is a reasonable target now”.

Huawei’s net profit margin overall dropped to 7.1 percent from 9.3 percent a year ago.

Additional spending by the company’s consumer business contributed 0.9 percentage points to the decline in net profit margin, chief financial officer Sabrina Meng said.

“I see 2017 as a consolidation year for Huawei, holding share steady and focusing on a return to profit before it considers its next move,” said Richard Windsor, an independent tech analyst.

Revenue from its consumer business grew 44 percent to 179.8 billion yuan ($26 billion).

Huawei shipped 139 million phones last year, up 29 percent compared with a flat global smartphone market. That just missed an earlier target of 140 million.

To offset rising production costs, Huawei and other Chinese firms are expected to increase prices for their smartphones this year, said Avril Wu, analyst with market intelligence firm Trendforce.

Revenue from its carrier business group, which competes with Sweden's Ericsson ERICb.ST for the top spot globally for telecommunication equipment, rose 24 percent to 290.6 billion yuan thanks to demand for 4G communications equipment.

Revenue from its enterprise business group climbed 47 percent to 40.7 billion yuan.

Reporting by Sijia Jiang; Editing by Anne Marie Roantree, Edwina Gibbs and Randy Fabi