玖龙纸业(02689) 　　Market leader. With total design capacity of 13.7 million tpa during FY2016, ND Paper is the largest containerboard manufacturer in China and Asia, and one of the largest producers in the world, in terms of design capacity. It primarily engages in the production and sale of a broad variety of packaging paperboard products, including linerboard, high performance corrugating medium and coated duplex board, as well as printing and writing paper products. 　　Margin to improve. In view of improving market outlook and stabilising ASP, we expect ND Paper’s overall gross margin to improve marginally in coming years. As such, its gross profit is expected to grow at FY2016-19E CAGR of 5.3%. 　　Earnings to resume growth. After making a substantial loss on foreign exchange during FY2016, ND Paper managed to reduce its foreign exchange exposure. The company’s non-Rmb bank borrowings accounted for less than 40% of its total borrowings compared to over 70% as at end of FY2015. In anticipation of a significant decrease of foreign exchange loss, we expect its net margin to enlarge by 3.8ppt YoY to 7.3% in FY2017E. Consequently, we expect its net profit to rise by more than a double to Rmb2,448m in FY2017E and grow by 9% YoY to Rmb2,668m in FY2018E. All in all, we expect its net profit to grow at 2016-19E CAGR of 36.4%. 　　Initiate Accumulate. At HK$6.27, ND Paper is valued at 10.4x 2017E PE, at par with the median of its peers. However, this valuation is about 32% below its 5-year average. In terms of PB ratio, ND Paper’s PB ratio of 0.98x is over 15% below the median of its peers. Considering its earnings are set to resume growth in FY2017E and onwards, we set our target price at HK$7.20, equivalent to 12x FY2017E PE (20% below its 5-year average). In light of over 10% upside potential, we initiate our Accumulate recommendation on ND Paper . 　　Key risks include 1) fluctuations of exchange-rate, 2) rising raw material prices, 3) interest rate hike, 4) slowing global economy and 5) keen competition.