By Jennifer Tan, Reuters

SINGAPORE, Aug 8 (Reuters) - Creative Technology Ltd., whose Nomad and Zen MP3 players aim to compete with Apple`s iPod, probably swung to a quarterly loss and wrote off unsold stock, after consumer demand softened and stiff competition hit margins.

Singapore-based Creative also suffered in the September quarter as Apple Computer Inc. cut prices by up to 20 percent to clear excess stockpiles, and analysts said Creative`s fundamentals are likely to worsen.

``Competition is intense and going to get more cut-throat. ASPs (average selling prices) and margins continue to decline and Creative faces large losses in the near to medium term,`` said CLSA Asia-Pacific Markets analyst Atul Goyal.

Creative`s main competitors are electronics giants Samsung Electronics Co. Ltd. <005930.KS>, which produces the Yepp players, and Walkman maker Sony Corp. <6758.T>.

Mobile handset makers Nokia Oyj and Motorola Inc. are also adding MP3 functions to high-end music phones.

``The MP3 player market will be at its most competitive this Christmas, with more MP3 music phones coming out and new products from Sony and Samsung -- consumers will be spoilt for choice,`` said UOB-Kay Hian Securities analyst Jonathan Koh.

A Reuters poll of six analysts showed Creative reporting an average net loss of $7.2 million for its fiscal fourth quarter, ended in June, compared with a $6.6 million net profit last year.

The company reports its results on Thursday.

WARNINGS SIGNS

In June, Nasdaq-listed Creative slashed its quarterly sales and gross margin outlook, citing weak demand and low selling prices.

It said it would post an operating loss for the three months ended June 30 and cut its sales forecast for the period to about US$300 million, below its April forecast for as much as $360 million.

Loss estimates, which range from $4.0 million to $10.3 million, do not include write-downs for excess inventory or investment losses from its portfolio, analysts said.

Goyal, who has set a 12-month price target of S$7.40, more than 40 below Friday`s closing price of S$12.90, estimated that Creative`s stockpiles stood at $451 million, or six months` of sales.

``Given the short product life-cycle for MP3 players, we believe a large part of this inventory is bound for a write-off,`` he added.

Creative`s gross margin probably shrunk to below 20 percent in the June quarter, from 32.9 percent in the year-ago period, and compared with Apple`s iPod margin of around 20 percent, analysts said.

Last month, Apple beat expectations with quarterly profit jumping five-fold to $320 million. Revenue surged 75 percent to $3.52 billion.

Creative has produced some of the strongest contenders to the iPod, but Apple still leads the disk-drive music player market. Analysts estimate it has about 60-70 percent market share, compared with up to a quarter for Creative.

Digital entertainment devices, including MP3 players, musical computer keyboards and speakers, account for about 60 percent of Creative`s sales, compared with 18 percent two years ago when its main business was computer sound cards.

Creative Chief Executive Sim Wong Hoo pledged $100 million in worldwide marketing spending this year and promised to out-market its rivals, but analysts are sceptical that Creative has the resources to effectively compete against the bigger players.

The stock has fallen 26 percent in the last 12 months, underperforming Apple shares which have nearly trebled in the same period.

((Editing by Christopher Kaufman; jennifer.tan@reuters.com; Reuters Messaging: jennifer.tan.reuters.com@reuters.net; +65-6870 3083))