HONG KONG — As the fervor over 5G gradually recedes, the three Chinese state-owned telecom operators are seeking new revenue sources beyond traditional telecommunications, including cloud services.

“We have made it very clear since 2019 on our three transitions based on digitalization,” China Mobile Chairman Yang Jie told reporters Thursday at the company’s midyear earnings news conference in Hong Kong. Topping his list is a shift “from telecommunication to information.”

Yang cited so-called digital transformation revenue, a proprietary figure aiming to capture new digital revenue sources beyond traditional voice and data service. According to the latest announcement, this was 132.6 billion yuan ($18.4 billion) for the first six months of 2023, marking 19.6% year-on-year growth and accounting for 29.3% of the company’s telecommunications services revenue of 452.2 billion and about a quarter of its total revenue of 530.7 billion yuan.

Mobile cloud services sit at the core of this, with revenue jumping 80.5% to 42.2 billion yuan in the first half of the year. “It’s no longer possible just to follow the ARPU,” Yang stressed, referring to average revenue per user — a traditional metric for mobile phone subscribers used to measure telecom carriers’ performance.

Despite having a highly profitable and stable business protected by government license, the telcom companies have lost luster as a growth sector over the years, as they have been considered more a low-growth, defensive sector. Digitalization and cloud services are seen as driving forces to change this perception.

China Telecom, a state-owned peer of China Mobile, is heading the same direction but using a different name and categorization. Revenue from “industrial digitalization” grew 16.7% from a year earlier to 68.8 billion yuan, acting as a major driving force in pushing overall revenue up 7.6% for the first half of the year. More than two-thirds of the company’s top-line growth came from this segment, which is led by cloud services, churning out 45.8 billion yuan — a 63.4% increase on the year.

While China Telecom lags behind China Mobile in the number of mobile subscribers — 401.9 million versus 985.3 million as of the end of June — it is taking a lead in cloud and vowed to maintain that market position.

“The annual target of reaching 100 billion yuan in cloud is firmly unchanged,” China Telecom Chairman and CEO Ke Ruiwen told reporters Tuesday at its earnings news conference. This means 73% growth for the year, while China Mobile Vice President Zhao Dachun revealed Thursday that it is aiming for annual cloud revenue of “over 80 billion yuan.”

China Unicom, smallest of the three, also places high hope on what it calls industry internet revenue. This segment reached 42.9 billion yuan during the first half, growing 16.3% on the year to far outpace the overall revenue growth of 8.8%. Here again, cloud services are the core of the new growth engine, expanding 36.4% to 25.5 billion yuan for the first half and targeting over 50 billion yuan for the full year.

Thanks to their cash-generating mobile phone businesses, the three telcom companies continue to increase their dividend payouts. China Mobile announced that it will pay 2.43 Hong Kong dollars (31 cents) per share as an interim dividend, a 10.5% jump from a year earlier, while pledging to allocate 70% or more of its net profit to dividends for the full year. China Telecom also promises a dividend payout ratio of 70% or more, while China Unicom’s stands at around 50%.

While Chinese equities are losing momentum after high hopes for a strong post-COVID rebound were dashed by weak economic data, the three telcom companies are holding on firmly, for their new growth potential and high dividend payouts. The prices of all three Hong Kong-listed shares have gained between 17% and 27% this year through Thursday, while the benchmark Hang Seng Index lost 3% over the same period.

But as competition intensifies, a price war is emerging in Chinese cloud services. “Price is an important factor,” China Telecom’s Ke said, acknowledging competitive price-cutting. But he is confident that the company can weather the battle, backed by such strengths as its technology, service packaging with 5G, and its brand recognition as a state telecom operator. Pricing “is not the only factor and I believe it is not a determining factor,” Ke said.

China Mobile’s Zhao cited having an “advantage as a central company and as a state team,” referring to its status as a major state-owned conglomerate directly controlled by the central government, likely hinting at an edge in landing contracts from state-owned enterprises.

Michelle Fang, a Hong Kong-based telecom analyst at Citi who gives “buy” ratings for all three, agrees. On China Unicom, she said its cloud business customers “are more toward government and SOEs, focusing more on the security rather than price.”

But state-owned players also carry their own risks. They are tied to state policies and may lack flexibility in execution. Edison Lee, a Hong Kong-based telecom analyst at Jefferies, pointed to the case of China Unicom, whose chairman and CEO positions became vacant July 30. Liu Liehong, who held both posts, resigned when he was appointed as minister of the newly established national data bureau of the State Council, China’s central government.

“This is only one example indicating why we see higher execution risk,” Lee said.