Tianju Dihe Benefits From China's Growing Digital Economy

The low-profile company posted strong double-digit profit growth last year on rising demand for its data-transfer services

Key Takeaways:

• Tianju Dihe said its net profit last year increased as much as 51% on the back of solid revenue growth
• Demand for the company's services is on the rise as China's digital economy expands, helped by favorable government policies

Tianju Dihe (Suzhou) Data Co. Ltd. (2479.HK) is a hardly a name that rolls off the tongue. But this low-key company is happy to stay behind the scenes, where its data-transfer services are powering strong profit growth as it thrives in the current upbeat climate for higher-profile Chinese tech companies that are some of its key customers.

In a filing last Friday, Tianju Dihe said it expects to post a net profit of 50 million yuan ($6.9 million) to 53 million yuan for last year, up 43% to 51% from 2023, when it reports its first annual results since going public in Hong Kong last June. Tianju Dihe shares rose 2.7% on Monday after the announcement.

The company didn't provide much detail in its announcement, other than attributing the earnings jump to a big revenue increase, especially from its core application programming interface (API) business. But the company's midyear report released last August helps to explain what likely propelled the large profit gain.

Tianju Dihe's revenue increased 48% year-on-year to 259 million yuan in the first six months of last year, while its gross profit grew by an even faster 62% to 56 million yuan, indicating that its margins improved. The company's net profit for the six months, after the deduction of listing expenses, totaled 20 million yuan, up 42% from a year earlier.

Tianju Dihe earns the bulk of its revenue from API services that facilitate exchanges of data. An API is essentially a protocol that enables two applications to "talk" to each other. For example, if a user of a mobile app requests weather information, the app sends out a request via an API to a source of relevant data. The source then processes the request, retrieves information and sends it back to the mobile app via the API.

APIs that handle such queries are Tianju Dihe's biggest revenue source. The most popular one among them is used to verify identifications based on names, mobile phone numbers and identity card numbers. Tianju Dihe's customers also use APIs for text-message notification services, as well as mobile money top-ups. 

As of the end of last June, Tianju Dihe had more than 400 proprietary APIs available for its customers, which include internet titans like Tencent and Alibaba, as well as China's top three wireless carriers.

Tianju Dihe also started offering data management services in 2020, and this segment accounted for about 13% of its revenue in the first half of last year. But the proportion probably was much larger at the end of 2024, as the company typically completes these services on a project basis in the fourth quarter of each year and recognizes revenue at that time.

Policy support

While China's slowing economy has put a damper on growth for many companies, Tianju Dihe is a rare exception that is bucking the trend. Indeed, the company has quite a lot of things working in its favor. For starters, China's digital economy, which essentially includes any business that uses data and information technology for resource distribution and production, is growing fast, despite the broader economic slowdown. That digital transformation has become one of the critical driving forces of China's overall economic growth lately, mitigating the effects of the broader slowdown caused by slumping consumer demand.

The country's digital economy grew about 10% in 2022, according to the prospectus for Tianju Dihe's IPO last year. As a quick reminder, lockdowns to prevent the spread of Covid-19 were still common across China in 2022, including in Shanghai, and the world's second-largest economy grew just 3% that year. So, the 10% growth rate in such circumstances looks quite strong.

The value-added output of core industries in the digital economy amounted to 10% of China's total GDP in 2023, according to official data. That's significant as the milestone was reached two years ahead of the government's target.

And the mere fact that Beijing has such a goal means it's ready to roll out policy support for the digital economy. Under its latest five-year plan for digital economy development, China wants to enhance its capabilities in strategic technology areas and digitalize supply chains by better utilizing data resources.

Such a policy direction is creating a fertile ground for Tianju Dihe to grow, especially as Beijing takes steps to grant public access to non-sensitive data. Among other measures, the Chinese government has proposed creating a mechanism to share public institution data on things like corporate registration, public health, transportation and weather. Such measures should boost demand for data exchanges that are Tianju Dihe's main area of expertise.

Regulators in China also gave big tech companies a hard time for many years over their data protection practices, leading to dampened investment in new technologies, as well as weak investor sentiment towards the group. But the mood has brightened significantly lately, following the emergence of AI startup DeepSeek and President Xi Jinping's seeming new endorsement of tech companies and their important role in China's economy.

The shift likely reflects a recognition among policymakers that development of the domestic tech sector is critical for China's economic growth. That change in stance is gaining growing momentum in the face of overseas risks, such as trade tensions with the U.S. and Europe that threaten to dampen exports that are one of the country's most important economic engines. That should provide a lift for companies across China's digital economy, including Tianju Dihe.

Tianju Dihe's shares have gained 36% since the company's IPO to trade at a price-to-sales (P/S) ratio of 7. That's more than double the 2.5 for bellwether tech giant Alibaba, though it's roughly comparable to Tencent's ratio of 7.27. Given the company's growth potential in China's current tech-friendly environment, its current valuation may well be justified, with room for further gains if the company can keep posting strong double-digit profit and revenue growth.