Hengan Intl. - Short-term cost control starting to bear fruit; upgrading to Hold (1044.HK, Hold, Target Price: HKD 60.10, Closing Price: HKD 66.05, Anne Ling)    We upgrade Hengan to Hold because we think that in the short term the company is benefiting from management’s initiatives to restructure its sales team (Amoeba model), which creates entrepreneurship among sales leaders. We see this as enabling better cost efficiency while resuming sales growth. As these initiatives only started in May, they should have a positive impact on the company for the next couple of years. We thus factor in a higher EBIT margin for 2017 onwards and raise 2017-19E NP by 11-15%. Longer term, we think Hengan is facing challenges from international brands and channel disruptions, which it needs to address over time. (Anne Ling - 852 2203 6177)

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