SEOUL (Reuters) - Hyundai Motor forecast a gradual earnings recovery after posting a smaller-than-expected 21 percent fall in quarterly profit as sales of higher-margin cars cushioned the impact of a U.S. recall and revenue decline in China.

Slideshow ( 2 images )

The forecast-beating earnings helped Hyundai shares rise 4.5 percent. The South Korean automaker’s shares have been under pressure recently due to concerns about prolonged weakness in China, its biggest market, as South Korea moves ahead with its plan to deploy a U.S. anti-missile defense system despite China’s opposition.

The world’s fifth-biggest automaker together with affiliate Kia Motors reported on Wednesday a first-quarter net profit of 1.33 trillion won ($1.18 billion), its 13th straight year-on-year quarterly fall. Analysts polled by Thomson Reuters I/B/E/S had on average expected a 1.25 trillion won net profit.

Hyundai posted an operating profit of 1.25 trillion won and sales of 23.37 trillion in the January to March quarter.

Its retail sales slumped 14 percent in the first quarter in China, a market where it has been struggling for some time now.

“China sales falls in March are not the result of internal factors, but the result of growing anti-Korean sentiment since late February, and some rivals taking advantage of anti-Korean sentiment in marketing,” Zayong Koo, Hyundai vice president, said on a conference call.

With a heavy reliance on sedans and a poor brand image in the world’s largest auto market, Hyundai has struggled to compete with local Chinese brands that are armed with affordable SUVs. Hyundai sharply cut production at China factories in March to reduce inventories, sources previously told Reuters.

Koo said Hyundai will launch three new China-tailored models, including a compact SUV, this year and an electric car on the mainland to help recover sales.

But Ko Tae-bong, an analyst at Hi Investment & Securities, expected the full impact from China’s political row in the second quarter. “What is worrisome is the China market,” he said.

Despite challenges in China and the United States, Hyundai expects a “gradual recovery in earnings” as it plans to launch a small SUV and G70 Genesis sedan in South Korea and Europe this year, which garner higher margins than small sedans, and as Brazil and Russia are recovering.

Hyundai said its recent recall incurred costs of some 200 billion won, which were reflected in the first-quarter operating profit. Hyundai and Kia previously announced plans to recall nearly 1.5 million vehicles over defective engines in North America and South Korea.