<PAGE>
THE MALAYSIA FUND, INC.
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
Barton M. Biggs William G. Morton, Jr.
CHAIRMAN OF THE BOARD DIRECTOR
OF DIRECTORS
Michael F. Klein James W. Grisham
PRESIDENT AND DIRECTOR VICE PRESIDENT
Peter J. Chase
DIRECTOR Harold J. Schaaff, Jr.
John W. Croghan VICE PRESIDENT
DIRECTOR
David B. Gill Joseph P. Stadler
DIRECTOR VICE PRESIDENT
Graham E. Jones
DIRECTOR Valerie Y. Lewis
John A. Levin SECRETARY
DIRECTOR
Dato Malek Merican Joanna M. Haigney
DIRECTOR TREASURER
Belinda A. Brady
ASSISTANT TREASURER
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U.S. INVESTMENT ADVISER
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- --------------------------------------------------------------------------------
MALAYSIAN INVESTMENT ADVISER
Arab-Malaysian Consultant Sdn Bhd
21st-29th Floors, Bangurian Arab-Malaysian
Jalan Raja Chulan, 5200 Kuala Lampur, Malaysia
- --------------------------------------------------------------------------------
ADMINISTRATOR
The Chase Manhattan Bank
73 Tremont Street
Boston, Massachusetts 02108
- --------------------------------------------------------------------------------
CUSTODIANS
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
The Chase Manhattan Bank
3 Chase MetroTech Center
Brooklyn, New York 11245
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICING AGENT
Boston Equiserve
Investor Relations Department
P.O. Box 644
Boston, Massachusetts 02102-0644
(617) 575-3120
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LEGAL COUNSEL
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
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INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
- --------------------------------------------------------------------------------
For additional Fund information, including the Fund's net asset value per share
and information regarding the investments comprising the Fund's portfolio,
please call 1-800-221-6726.
- --------------------------------------------------------------------------------
THE
MALAYSIA FUND,
INC.
- --------------------------------------------------------------------------------
THIRD QUARTER REPORT
SEPTEMBER 30, 1997
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
<PAGE>
LETTER TO SHAREHOLDERS
- ---------
For the nine months ended September 30, 1997, The Malaysia Fund, Inc. (the
"Fund") had a total return, based on net asset value per share, of -55.46%
compared to -48.80% for the U.S. dollar adjusted Kuala Lumpur Stock Exchange
Index (the "Index"). For the three months ended September 30, 1997, the Fund
had a total return, based on net asset value per share, of -47.29% compared with
- -41.17% for the Index. For the period since the Fund's commencement of
operations on May 4, 1987 through September 30, 1997, the Fund's total return,
based on net asset value per share, was 40.11% compared to 59.03% for the
Index. On September 30, 1997, the closing price of the Fund's shares on the New
York Stock Exchange was $10.06, representing a 21.5% premium to the Fund's net
asset value per share.
The Malaysian stock market continued its decline in the third quarter of 1997
and plummeted sharply after Prime Minister Mahathir, reacting to an earlier
steep decline in share prices, imposed restrictions on the sale of Index stocks
on August 28, 1997. This triggered massive panic selling by investors of
non-Index stocks which led to a sharp discrepancy between the performance of
Index and non-Index stocks. The decline in the market was further compounded by
the falloff in the ringgit as currency traders sold down the Malaysian currency
following suggestions by the Prime Minister to ban currency trading.
Following the collapse in the stock market, the Malaysian authorities sought to
allay investors' fears by announcing plans to defer large scale infrastructure
projects. Further, the Central Bank held interest rates steady despite the
intense selling pressure on the ringgit and banks generally were advised not to
raise the base lending rates and to refrain from liquidating margin accounts.
These measures taken by the Malaysian authorities coupled with the use of
government-linked funds in supporting key component stocks helped in preventing
the market from crashing below the 760 level.
After ten years of uninterrupted economic growth of above 8%, Malaysia is
finally facing a decline following the devaluation of the Thai baht on July 2
which subsequently carried over to the ringgit. While GDP growth for 1997 is
expected to exceed 7%, growth is projected to slow down in 1998 with the
anticipated cutback in infrastructure spending, decline in domestic consumption
and a slowdown in investments as a result of a selloff in the stock market and
the devaluation of the ringgit. For 1998, the Central Bank has estimated GDP
growth to be approximately 6%.
Inflation, as measured by changes in the CPI, continued to average around 3.5%
in the nine months ended September 30, 1997. However, the sharply weaker
ringgit may result in higher inflation with the CPI estimated to rise to 6.5% in
1998.
The Fund's underperformance of the Index for the nine months ended September 30,
1997 was primarily due to its underweight position in Petronas Gas which
remained strong in a falling market. However, the strong gains of some of the
Fund's other holdings in Rothmans Malaysia and Tenaga Nasional helped to
mitigate its underperformance.
It is the policy of the Fund to invest, under normal circumstances, at least 80%
of its net assets in equity securities of Malaysian incorporated companies
listed on the Kuala Lumpur Stock Exchange. During temporary defensive periods,
however, the Fund may reduce its holdings of equity securities of Malaysian
companies and increase its holdings in bonds or in short-term debt obligations,
hold cash or invest in money-market instruments.
Looking forward, the Fund's stock holdings also will be adjusted to favor stocks
of companies with solid balance sheets, strong orientation towards export income
and operating niches, such as utilities and insurance, which are less vulnerable
to current measures. In light of the recent selloff in the stock market and the
devaluation in the ringgit, the Fund, consistent with its investment guidelines,
has brought its cash level to approximately 20% of total assets to protect its
capital in the current environment. Although the Fund is permitted to
temporarily increase its cash position above 20% during periods of market
volatility, we intend, consistent with the Fund's long-term investment
objectives, to remain invested in Malaysian equity securities, even during
market downturns.
Sincerely,
/s/ Michael F. Klein
Michael F. Klein
PRESIDENT AND DIRECTOR
/s/ Joseph Tern
Joseph Tern
PORTFOLIO MANAGER
October 1997
2
<PAGE>
THE MALAYSIA FUND, INC.
INVESTMENT SUMMARY AS OF SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL TOTAL RETURN (%)
INFORMATION -----------------------------------------------------------------------
MARKET VALUE (1) NET ASSET VALUE (2) INDEX (3)
--------------------- --------------------- ---------------------
AVERAGE AVERAGE AVERAGE
CUMULATIVE ANNUAL CUMULATIVE ANNUAL CUMULATIVE ANNUAL
---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
FISCAL YEAR TO DATE -40.34% -- -55.46% -- -48.80% --
ONE YEAR -37.85 -37.85% -53.40 -53.40% -44.59 -44.59%
FIVE YEAR 35.15+ 6.21+ -6.79+ -1.40+ 4.00 0.79
SINCE INCEPTION* 70.28+ 5.24+ 40.11+ 3.29+ 59.03 4.56
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- --------------------------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
[CHART]
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31:
NINE MONTHS
ENDED
SEPTEMBER 30,
1987* 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
---- ----- ---- ---- ---- ---- ---- ---- ---- ---- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value Per
Share. . . . . . . $7.42 $8.98 $13.77 $12.41 $13.55 $16.28 $27.32 $18.57 $18.58 $19.29 $8.28
Market Value Per
Share. . . . . . . $5.88 $7.50 $18.75 $11.38 $11.75 $16.25 $28.00 $17.38 $17.00 $17.50 $10.06
Premium/(Discount) . -20.8% -16.5% 36.2% -8.3% -13.3% -0.2% 2.5% -6.4% -8.5% -9.3% 21.5%
Income Dividends . . $0.15 $0.17 $0.11 $0.21 $0.07 -- $0.16 $0.02 -- -- --
Capital Gains
Distributions. . . -- -- -- -- -- -- $1.13 $3.59 $0.84 $2.82 $0.51
Fund Total Return (2) -32.20% 23.32% 54.57% -8.35% 9.80% 20.15% 98.28%+ -18.87% 4.33% 19.93% -55.46%
Index Total Return (3) -33.54% 25.73% 57.91% -10.02% 9.13% 20.19% 92.60% -19.66% 3.05% 25.12% -48.80%
</TABLE>
(1) Assumes dividends and distributions, if any, were reinvested.
(2) Total investment return based on net asset value per share reflects the
effects of changes in net asset value on the performance of the Fund during
each period, and assumes dividends and distributions, if any, were
reinvested. These percentages are not an indication of the performance of a
shareholder's investment in the Fund based on market value due to
differences between the market price of the stock and the net asset value
per share of the Fund.
(3) The U.S. dollar adjusted Kuala Lumpur Stock Exchange (KLSE) Composite Index
is a broad based capitalization weighted index of 100 stocks listed on the
exchange, including dividends.
* The Fund commenced operations on May 4, 1987.
+ This return does not include the effect of the rights issued in connection
with the Rights Offering.
3
<PAGE>
THE MALAYSIA FUND, INC.
PORTFOLIO SUMMARY AS OF SEPTEMBER 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
PORTFOLIO INVESTMENTS DIVERSIFICATION
[CHART]
Equity Securities (68.4%)
Short-Term Investments (31.6%)
- --------------------------------------------------------------------------------
SECTORS
[CHART]
Banking (6.5%)
Beverages & Tobacco (4.2%)
Broadcasting & Publishing (7.7%)
Electrical & Electronics (4.0%)
Energy Sources (3.9%)
Financial Services (6.1%)
Leisure & Tourism (8.6%)
Machinery & Engineering (3.2%)
Multi-Industry (5.2%)
Utilities-Electrical & Gas (4.9%)
Other (45.7%)
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS*
PERCENT OF
NET ASSETS
----------
1. Genting Bhd 5.9%
2. Tenaga Nasional Bhd 4.9
3. New Straits Times Press Bhd 4.7
4. Malayan Banking Bhd 4.0
5. Lityan Holdings Bhd 4.0
6. Dialog Group Bhd 3.8
7. Rothmans of Pall Mall Bhd 3.4
8. United Engineers Bhd 3.2
9. Kentucky Fried Chicken Holdings Bhd 2.9
10. Golden Hope Plantations Bhd 2.9
-----
39.7%
-----
-----
* Excludes short-term investments.
4
<PAGE>
INVESTMENTS (UNAUDITED)
SEPTEMBER 30, 1997
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
MALAYSIAN COMMON STOCKS (73.6%)
(Unless otherwise noted)
- --------------------------------------------------------------------------------
AUTOMOBILES (1.1%)
Tan Chong Motor Holdings Bhd 1,063,000 U.S.$ 875
------------------
- --------------------------------------------------------------------------------
BANKING (6.5%)
Commerce Asset Holding Bhd 348,000 391
Commerce Asset Holding Bhd
(Warrants) expiring 6/27/98 217,500 71
Malayan Banking Bhd 650,100 3,266
Public Bank Bhd (Foreign) 1,000,000 866
Southern Bank Bhd (Foreign) 500,000 684
------------------
5,278
------------------
- --------------------------------------------------------------------------------
BEVERAGES & TOBACCO (4.2%)
R.J. Reynolds Bhd 393,000 672
Rothmans of Pall Mall Bhd 339,000 2,743
------------------
3,415
------------------
- --------------------------------------------------------------------------------
BROADCASTING & PUBLISHING (7.7%)
Nanyang Press Bhd 350,000 712
New Straits Times Press Bhd 1,263,000 3,815
Star Publications 743,000 1,718
------------------
6,245
------------------
- --------------------------------------------------------------------------------
BUILDING MATERIALS & COMPONENTS (1.7%)
Cahya Mata Sarawak Bhd 500,000 901
Magna Prima Bhd 252,000 474
------------------
1,375
------------------
- --------------------------------------------------------------------------------
CONSTRUCTION & HOUSING (1.3%)
Gamuda Bhd 602,000 1,030
------------------
- --------------------------------------------------------------------------------
ELECTRICAL & ELECTRONICS (4.0%)
Lityan Holdings Bhd 625,000 3,256
------------------
- --------------------------------------------------------------------------------
ENERGY SOURCES (3.9%)
Dialog Group Bhd 559,000 3,067
Malakoff Bhd 18,000 52
------------------
3,119
------------------
- --------------------------------------------------------------------------------
FINANCIAL SERVICES (6.1%)
Gadek Capital Bhd 893,000 771
Golden Hope Plantations Bhd 1,588,000 2,310
Hap Seng Consolidated Bhd 600,000 1,091
MBF Capital Bhd 700,000 583
Puncak Niaga Holding Bhd 41,000 56
Rashid Hussain Bhd (Warrants)
expiring 3/25/02 145,714 110
------------------
4,921
------------------
- --------------------------------------------------------------------------------
FOOD & HOUSEHOLD PRODUCTS (2.9%)
Kentucky Fried Chicken
Holdings Bhd 967,000 2,250
Kentucky Fried Chicken
Holdings Bhd (Warrants)
expiring 2/7/01 135,000 67
------------------
2,317
------------------
- --------------------------------------------------------------------------------
FOREST PRODUCTS & PAPER (1.7%)
Jaya Tiasa Holdings Bhd 500,000 1,379
------------------
- --------------------------------------------------------------------------------
INSURANCE (1.8%)
Malaysian Assurance
Alliance Bhd 300,000 809
Malaysian National
Reinsurance Bhd 320,000 651
------------------
1,460
------------------
- --------------------------------------------------------------------------------
LEISURE & TOURISM (8.6%)
Berjaya Group Bhd 1,052,000 541
Genting Bhd 1,536,000 4,782
Magnum Corp. Bhd 500,000 439
Tanjong plc 540,000 1,157
------------------
6,919
------------------
- --------------------------------------------------------------------------------
MACHINERY & ENGINEERING (3.2%)
United Engineers Bhd 802,000 2,571
------------------
- --------------------------------------------------------------------------------
METALS - NON-FERROUS (2.3%)
MNI Holdings Bhd 600,000 1,822
------------------
- --------------------------------------------------------------------------------
MISCELLANEOUS MATERIALS & COMMODITIES (1.3%)
IOI Corporation Bhd 1,000,000 1,011
------------------
- --------------------------------------------------------------------------------
MULTI-INDUSTRY (5.2%)
Berjaya Sport Toto Bhd 300,000 860
Hicom Holdings Bhd 1,000,000 1,177
Killinghall Bhd 750,000 553
Sime Darby Bhd 776,400 1,615
------------------
4,205
------------------
- --------------------------------------------------------------------------------
REAL ESTATE (0.5%)
Malaysian Resources Corp. Bhd 433,333 378
------------------
- --------------------------------------------------------------------------------
TELECOMMUNICATIONS (1.7%)
Telekom Malaysia Bhd 460,000 1,397
------------------
- --------------------------------------------------------------------------------
TRANSPORTATION -- SHIPPING (3.0%)
Diperdana Corporation Bhd 135,000 537
Halim Mazmin Bhd 325,000 907
Malaysian International
Shipping Bhd (Foreign) 500,000 955
------------------
2,399
------------------
- --------------------------------------------------------------------------------
5
<PAGE>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
UTILITIES - ELECTRICAL & GAS (4.9%)
Tenaga Nasional Bhd 1,450,000 U.S. $ 3,911
------------------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost U.S.$ 89,431) 59,283
------------------
- --------------------------------------------------------------------------------
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (34.0%)
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT (34.0%)
Chase Securities, Inc., 5.75%,
dated 9/30/97, due 10/1/97,
to be repurchased at U.S.$
27,432, collateralized by U.S.
Treasury Note due 2/15/21,
valued at U.S.$ 27,973
(Cost U.S.$ 27,428) U.S.$ 27,428 27,428
----------
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (107.6%)
(Cost U.S.$ 116,859) 86,711
----------
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-7.6%)
Other Assets U.S.$ 59,184
Liabilities (65,326) (6,142)
---------------- -------
- --------------------------------------------------------------------------------
NET ASSETS (100%)
Applicable to 9,732,966 issued and outstanding
U.S.$ 0.01 par value shares (20,000,000 shares
authorized) U.S.$80,569
-----------
-----------
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE U.S. $8.28
-----------
-----------
- --------------------------------------------------------------------------------
NOTE: Prior government approval for foreign investments may be required
under certain circumstances in some emerging markets, and foreign
ownership limitations may also be imposed by the charters of
individual companies in emerging markets. As a result, an additional
class of shares designated as "foreign" may be created and offered for
investment. The "local" and "foreign" shares' market values may vary.
6
