China weighs on Smith & Nephew's first-quarter revenue

* First (Other OTC: FSTC - news) -quarter revenue $1.14 billion vs consensus $1.16 bln

* Company sees improvement in China in second half (Adds CFO comments, shares, background)

By Ben Hirschler

LONDON, May 5 (Reuters) - Smith & Nephew (LSE: SN.L - news) , Europe's biggest maker of artificial knees and hips, reported a smaller than expected 3 percent rise in first-quarter revenue on Thursday after weakness in China and the oil-rich Gulf states offset good U.S (Other OTC: UBGXF - news) . demand.

Shares (Berlin: DI6.BE - news) in the British group, which competes with larger rivals in the orthopaedics market and has long been viewed as a potential takeover target, dropped 1.5 percent on the news.

A strong dollar also dragged on results, with revenue of $1.14 billion falling short of a $1.16 billion forecast by analysts, as compiled by Thomson Reuters (Dusseldorf: TOC.DU - news) . Growth on an underlying basis was 4 percent after stripping out currency effects and recent acquisitions.

Chief Financial Officer Julie Brown said Chinese that destocking of trauma, sports medicine and wound-management products had been a problem since mid-2015 but the impact on results should ease in the second half of the year.

"We expect this to continue into Q2, but then we will have lapped this issue from Q3 onwards," she told Reuters.

Emerging markets, which account for 13 percent of Smith & Nephew's sales, are an important growth opportunity for the group as demand for Western treatment grows. China alone makes up 40-45 percent of its sales in developing economies.

Demand growth in China, however, has slowed with the economy, while the Gulf states have weakened because of the prolonged downturn in oil prices.

The medical devices group said it continued to expect good underlying growth in 2016 overall, benefiting from investments in existing businesses and acquisitions.

Brown said she still expects adverse currency moves to drag on 2016 margins by about 120 basis points.

Though analysts view S&N as a potential takeover target, with its relatively small size seen by some as a handicap as hospitals seek to consolidate suppliers to save costs, no bidder has yet materialised for the company, which has a market value of nearly $15 billion. (Editing by Jason Neely and David Goodman)