Jon R. Carnes has over 25 years experience investing in a broad range of industries and companies of all sizes. From 1992 to 2000 he built a successful stock trading business, becoming the largest private client at two major electronic brokerage houses. Since 2001 he has focused exclusively on value investing, spending five years in China establishing Eos’s commitment to finding opportunities in this sector. Mr. Carnes is a Phi Beta Kappa graduate of the University of South Carolina with a degree in business economics.

In addition to investing, Mr. Carnes arranged initial financing for the production of a Sundance nominated documentary, I.O.U.S.A., that warned Americans about the looming debt crisis and starred Bill Bixby, Warren Buffett, and David Walker. In the six months following I.O.U.S.A.’s 8/21/2008 premiere, U.S. stocks fell by 40%. You can watch I.O.U.S.A. on Youtube here.



Mr. Carnes (right) discusses I.O.U.S.A with Warren Buffett and David Walker at the film’s premiere in Omaha.

In 2007, after receiving approval to expand its capacity in remote areas with geographic monopoly protection, Sichuan Zhiquan Cement Group approached us seeking financing. Zhiquan needed $40M first round financing to complete two modern rotary clinker production lines. Bank financing was out of the question since Zhiquan was not big enough to get favorable loans. Chairman Chen Zhiquan commented, "Eos offered us the investment capital we needed on reasonable terms. Eos not only invested but also managed the entire process. As my company's needs grew, Eos secured the investment and support of Merrill Lynch, one of the largest investment banks in the world."

The $40M investment in Zhiquan closed on September 26, 2008. What was remarkable about the investment was the fact that it was made at the original agreed on valuation decided in January, prior to the Chinese stock market's more than 50% fall. Eos honored its agreed valuation and saw no reason to demand a lower valuation just because the Chinese market had collapsed. Eos invests strictly based on value and growth potential. While Zhiquan's relative value had fallen, its growth potential had become more certain and was then worth even more.

Furthermore, when the Wenchuan earthquake destroyed one of Zhiquan's plants late in the investment process, Eos's president, Jon Carnes, immediately visited the site of the destruction and pledged to do everything possible to complete the investment on the original agreed terms. Despite the loss of earnings, Eos saw the long term potential to rebuild the region and advised investors to fund the investment at the original agreed valuation and also donated money to support the employees who had lost their homes.

As expected, Zhiquan's first round of financing was a lengthy and difficult process. The company had to be restructured into an entity suitable for foreign investment. Chairman Chen came to realize that "despite the extremely complicated process, Eos always maintained great confidence of the ultimate success and now that the process is complete our second round of financing will be much easier and I am positioned to have access to all the capital I need to become the dominant cement manufacturer in the region."

INTRODUCTION AND BACKGROUND

Since 2004, Eos has focused its investments in small and mid sized Chinese companies, participating in the Middle Kingdom’s astonishing growth.

Eos focuses on finding companies with superior management, sustainable market share and high return on invested capital. These three elements make up what Warren Buffett calls a “franchise” or business that has durable competitive advantages protecting it from competition.

Eos has achieved tremendous success from following a rigorous approach to due diligence, allowing us to avoid many of the frauds that tainted the reputation of the sector.

Eos’ largest investor is a nonprofit endowment fund that has donated over $3 million to various charitable causes since its establishment. Eos is domiciled in the Commonwealth of Dominica and does not accept or solicit investments from the public.

Investment Strategy

Eos follows a value investing approach focused on buying discounted shares in early stage companies with superior management performance, capable of achieving substantial market share and high return on invested capital.

We seek to invest in “franchises” that exhibit at least one of three competitive advantages. First and foremost are “demand” oriented advantages such as customer preference, habit, captivity, switching costs, or lack of substitutes. Second are supply advantages such as cost advantages, geography, technology, patents, or experience. Third are economies of scale whereby the largest company due to high fixed overhead and leading market share enjoys substantially lower per unit production costs than its smaller competitors.

Eos occasionally hedges its value investments by shorting: 1) Overvalued companies that have no competitive advantages, and 2) Questionable companies that fail our rigorous due diligence process.