SmarTone Telecommunications Holdings says 3G start-up costs will continue to weigh on margins in the second half of this year and increasing competition may turn its handset sales business into a loss. While SmarTone reported stronger mobile service revenue and average revenue per user (arpu) for its first half to December, the company said it expected an increase in third-generation network and marketing costs and handset subsidies might offset the improved fundamentals for the full year. 'Pending market environment over the next six months, [the need for heavy] handset subsidies may incur a loss for our handset sales business,' executive director Patrick Chan told reporters. Handset business accounted for 28.45 per cent of total turnover of $1.83 billion, which grew 18 per cent from a year ago. SmarTone, in which Sun Hung Kai Properties owns 52 per cent, reported a 4 per cent fall in net profit for the first half to $225.63 million from $235.14 million a year ago. The figures were, however, within analysts' expectations. The drop in net profit was caused by increased operating expenses, up 8.56 per cent to $850 million due to costs related to 3G network rollout and marketing expenses. Analysts tipped more of the same. 'We expect for the full year, SmarTone will have to book more than $60 million in 3G spectrum utilisation fee,' one said. The company declared an interim dividend of 19 cents, down 5 per cent from 20 cents paid out a year ago. Shares of SmarTone closed down 0.54 per cent at $9.05 yesterday.