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D&B's Chinese Unit Under Scrutiny

Zacks Equity Research

The Dun & Bradstreet Corp. (DNB) recently announced that operations at its Chinese subsidiary, Shanghai Roadway D&B Marketing Services Co. Ltd have been temporarily suspended, following an investigation into its alleged violation of U.S. and Chinese laws.

The subsidiary has been blamed for breaching Chinese consumer data privacy laws. The company is also inquiring into whether the employees of this subsidiary may have violated the Foreign Corrupt Practices Act (FCPA) as well as the anti-bribery law. The matter has been referred to the U.S. Department of Justice (:DOJ) and the Securities and Exchange Commission (:SEC) for further investigation.

Shanghai Roadway D&B Marketing Services Co. Ltd was formed after D&B acquired 90.0% stake in Roadway International Ltd and amalgamated D&B Huaxia’s sales and marketing business into the Roadways unit in 2009. D&B Huaxia was formed after D&B acquired a majority stake in Huaxia International Credit Consulting Co Ltd in 2007.

Shanghai Roadway D&B’s strong performance over the last couple of years consolidated D&B’s position in China and also helped D&B to continue its expansionary policy through acquisitions. In 2011, the company acquired substantially all the assets of MicoMarketing, a direct marketing services provider in China for approximately $14.0 million.

These acquisitions drove strong growth in China and subsequently in the Asia-Pacific. In 2011, the Asia-Pacific represented 51.0% of total international revenue and grew 51.8% on a year-over-year basis. We believe that D&B will continue to pursue strategic acquisitions particularly in the emerging economies of the Asia-Pacific, in order to compensate for the sluggish macro environment in Europe and North America.

However, the ongoing investigation is a matter of concern for D&B in our view. U.S.-based companies operating in China are always subject to heightened scrutiny and strict Chinese privacy laws make data collection, management and usage of information difficult. Further, the FCPA violation and the bribery claims remain an overhang on the stock going forward, in our view.

We believe that the subsidiary, if found guilty of violating privacy laws may not only attract strict penalty but can also put D&B’s other operations in jeopardy going forward. Moreover, any adverse finding of the investigation may also hurt customer confidence, which will have a negative impact on D&B’s subscriber growth over the long term.

We also believe that increasing competition from companies such as Equifax Inc. (EFX) and Moody’s Corp (MCO) will hurt profitability going forward. We, therefore maintain our Neutral recommendation over the long-term (6-12 months). Currently, D&B has a Zacks #3 Rank, which implies a short-term Hold rating.

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