<PAGE>
--------------------------------------------------------------------
THE
MALAYSIA FUND,
INC.
--------------------------------------------------------------------
SEMI-ANNUAL REPORT
JUNE 30, 1998
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
THE MALAYSIA FUND, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
Barton M. Biggs
CHAIRMAN OF THE BOARD
OF DIRECTORS
Michael F. Klein
PRESIDENT AND DIRECTOR
Peter J. Chase
DIRECTOR
John W. Croghan
DIRECTOR
David B. Gill
DIRECTOR
Graham E. Jones
DIRECTOR
John A. Levin
DIRECTOR
Dato Malek Merican
DIRECTOR
William G. Morton, Jr.
DIRECTOR
Stefanie V. Chang
VICE PRESIDENT
Harold J. Schaaff, Jr.
VICE PRESIDENT
Joseph P. Stadler
VICE PRESIDENT
Valerie Y. Lewis
SECRETARY
Joanna M. Haigney
TREASURER
Belinda A. Brady
ASSISTANT TREASURER
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
(800) 730-6001
- --------------------------------------------------------------------------------
LEGAL COUNSEL
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
- --------------------------------------------------------------------------------
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers 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.
<PAGE>
LETTER TO SHAREHOLDERS
- ---------
For the six months ended June 30, 1998, The Malaysia Fund, Inc. (the "Fund") had
a total return, based on net asset value per share, of -29.60% compared to
- -28.08% for the U.S. dollar adjusted Kuala Lumpur Stock Exchange Composite Index
(the "Index"). For the one year ended June 30, 1998 and for the period since the
Fund's commencement of operations on May 4, 1987 through June 30, 1998, the
Fund's total return, based on net asset value per share, was -77.55% and
- -40.32%, respectively, compared to -74.14% and -30.10%, respectively, for the
Index. On June 30, 1998, the closing price of the Fund's shares on the New York
Stock Exchange was $5 3/8, representing a 54.2% premium to the Fund's net asset
value per share.
The Malaysian stock market resumed its decline in the second quarter following
its sharp rally during the first quarter of 1998. The Index fell 44.26% in U.S.
dollar terms during the second quarter. The Fund was affected by these market
conditions and the Fund's net asset value fell 42.12% during the second quarter.
The key factor behind the market's decline was the realization that the economy
had fallen into a recession that would be more severe and last longer than
anticipated. To understand the causes of the recession and what needs to happen
for the economy to improve, one must understand a few features of the Malaysian
economy. The first is that exports are very important to Malaysia. Exports
have equaled 70-80% of gross domestic product over the last few years.
Electronics exports are particularly significant. Export growth in U.S. dollar
terms had been lackluster in recent years even before the regional currency
crisis began. The ringgit devaluation theoretically should have boosted
exports, yet exports as measured in dollars have actually been falling in 1998.
Weak electronics demand and weak pricing power following the region-wide
devaluations have contributed to these declines. An improvement in export
trends would be a strong positive for the market.
The second key problem facing Malaysia is the high level of domestic debt built
up during the boom years. Unlike some of its neighbors, Malaysia does not face a
foreign debt crisis. However, domestic ringgit-denominated debt totals
approximately 160-170% of gross domestic product, which is a very high level.
The government tightened monetary policy early this year to defend the currency
during the worst of the regional currency crisis. Higher interest rates
strengthened the currency but had a severe impact on consumption and investment
given the economy's high leverage. For example, car sales fell over 60%
year-on-year during the first 5 months of 1998, falling to levels not seen in
ten years. Non-performing loans have been increasing rapidly within the banking
system during this period.
The government has responded to the country's economic problems. First, the
Malaysian government now acknowledges that the economy is likely to shrink this
year. Policy-makers recognize the banking system's bad loan problems, and are
currently arranging financing for a government-run Asset Management Corporation
which will buy bad loans from the banks. A fiscal package including higher
government infrastructure spending has been proposed and will be implemented
over the next twelve months. Finally, the government has signaled that monetary
policy will be eased. This has led to some currency weakness but is probably
necessary.
Within this context, the Fund is currently overweight U.S. dollar earning
exporters like Kuala Lumpur Kepong and consumer non-durable stocks, including
Rothmans and Nestle Malaysia. We like the local affiliates of consumer
multinationals in Malaysia due to their strong managements, high returns on
equity, sound balance sheets and exposure to markets where consumer demand has
been fairly resilient. We have been underweight the banks and the large
state-owned utilities, including Telekom Malaysia and Tenaga. However, we
recently added to our Telekom Malaysia position based on valuation and some
signs of consolidation within the telecommunication industry.
Beginning with this report, we are discontinuing our practice of designating an
individual portfolio manager to sign our reports to shareholders in order to
better reflect the "Team" investment approach of the Fund's investment adviser,
Morgan Stanley Asset Management ("MSAM"). The global emerging markets team at
MSAM has general oversight for the investment management of the Fund. Effective
August 1, 1998, Timothy D. Jensen and Ashutosh Sinha assumed primary
responsibility for the day-to-day management of the Fund's assets. Timothy
Jensen joined MSAM in 1998. He is a Principal and a member of MSAM's emerging
markets group focusing primarily on the East Asian markets. Prior to joining
MSAM, he was a Partner at Ardsley Partners, where he managed a portion of the
emerging markets assets. Prior to that, he was a Vice President at Bankers
Trust, where he was responsible for management of a Latin American equity
portfolio. Ashutosh Sinha joined MSAM in 1995. He is a Vice President and a
member of MSAM's emerging markets group focusing primarily on the East Asian and
Middle Eastern markets. Prior to joining MSAM, he spent two years at SBI Funds
Management Ltd., where he was an analyst for the India Magnum Fund. Previous to
that, he worked for three years as a consultant for Citicorp Overseas Software
Ltd.
Sincerely,
/s/ Michael F. Klein
Michael F. Klein
PRESIDENT AND DIRECTOR
July 1998
2
<PAGE>
The Malaysia Fund, Inc.
Investment Summary as of June 30, 1998 (Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURN (%)
HISTORICAL -------------------------------------------------------------------------------
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 -17.23% -- -29.60% -- -28.08% --
One Year -62.11 -62.11% -77.55 -77.55% -74.14 -74.14%
Five Year -48.53+ -12.44+ -68.82+ -20.79+ -60.58 -16.99
Ten Year 16.62+ 1.55+ -31.40+ -3.70+ -21.10 -2.34
Since Inception* -8.08+ -0.75+ -40.32+ -4.52+ -30.10 -3.16
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- -------------------------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
[GRAPH]
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
ENDED
JUNE 30,
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
------ ------- ------- ------- ------- ------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value Per Share.. $ 8.98 $ 13.77 $ 12.41 $ 13.55 $ 16.28 $ 27.32 $ 18.57 $ 18.58 $ 19.29 $ 5.04 $ 3.49
Market Value Per Share..... $ 7.50 $ 18.75 $ 11.38 $ 11.75 $ 16.25 $ 28.00 $ 17.38 $ 17.00 $ 17.50 $ 6.56 $ 5.38
Premium/(Discount)......... -16.5% 36.2% -8.3% -13.3% -0.2% 2.5% -6.4% -8.5% -9.3% 30.2% 54.2%
Income Dividends........... $ 0.17 $ 0.11 $ 0.21 $ 0.07 -- $ 0.16 $ 0.02 -- -- -- $ 0.03
Capital Gains Distributions -- -- -- -- -- $ 1.13 $ 3.59 $ 0.84 $ 2.82 $ 0.51 --
Fund Total Return (2)...... 23.32% 54.57% -8.35% 9.80% 20.15% 98.28%+ -18.87% 4.33% 19.93% -72.89% -29.60%
Index Total Return (3)..... 25.73% 57.91% -10.02% 9.13% 20.19% 92.60% -19.66% 3.05% 25.12% -68.71% -28.08%
</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 June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DIVERSIFICATION OF TOTAL INVESTMENTS
[CHART]
<TABLE>
<S> <C>
Equity Securities (84.9%)
Short-Term Investments (15.1%)
</TABLE>
- --------------------------------------------------------------------------------
SECTORS
[CHART]
<TABLE>
<S> <C>
Automobiles (5.2%)
Banking (4.3%)
Beverages & Tobacco (14.9%)
Energy Sources (7.0%)
Leisure & Tourism (8.1%)
Miscellaneous Materials & Commodities (12.9%)
Other (23.7%)
Utilities -- Electrical & Gas (9.2%)
Transportation -- Shipping (5.0%)
Telecommunications (5.1%)
Multi-Industry (4.6%)
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS*
<TABLE>
<CAPTION>
PERCENT OF
NET ASSETS
----------
<S> <C>
1. Rothmans of Pall Mall Bhd 5.8%
2. Telekom (Malaysia) Bhd 5.1
3. Malaysian International Shipping Bhd 5.0
4. Petronas Gas Bhd 4.7
5. Sime Darby Bhd 4.6
6. Genting Bhd 4.6
7. Tenaga Nasional Bhd 4.5
8. Malayan Banking Bhd 4.3
9. Kuala Lumpur Kepong Bhd 4.2
10. Tanjong plc 3.6
----
46.4%
----
----
</TABLE>
* Excludes short-term investments.
4
<PAGE>
FINANCIAL STATEMENTS
- ---------
STATEMENT OF NET ASSETS (UNAUDITED)
- ---------
JUNE 30, 1998
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------
<S> <C> <C>
MALAYSIAN COMMON STOCKS (90.4%)
(Unless otherwise noted)
- ----------------------------------------------------------------------------
AUTOMOBILES (5.2%)
MBM Resources Bhd 875,000 U.S.$ 230
Oriental Holdings Bhd 190,000 316
(a,b)Tan Chong International
(Hong Kong) 6,462,000 625
Tan Chong Motor Holdings Bhd 3,222,000 586
------------
1,757
------------
- ----------------------------------------------------------------------------
BANKING (4.3%)
Malayan Banking Bhd 1,445,000 1,455
Southern Bank Bhd (Foreign) 70,000 21
------------
1,476
------------
- ----------------------------------------------------------------------------
BEVERAGES & TOBACCO (14.9%)
Carlsberg Brewery (Malaysia) Bhd 351,000 1,066
Guinness Anchor Bhd 967,000 1,025
R.J. Reynolds Bhd 720,500 998
Rothmans of Pall Mall Bhd 283,000 1,960
------------
5,049
------------
- ----------------------------------------------------------------------------
BROADCASTING & PUBLISHING (2.5%)
Nanyang Press Bhd 295,000 206
Star Publications (Malaysia) 759,000 637
------------
843
------------
- ----------------------------------------------------------------------------
ELECTRICAL & ELECTRONICS (0.7%)
Lityan Holdings Bhd 36,000 15
Malaysian Pacific Industries Bhd 200,000 236
------------
251
------------
- ----------------------------------------------------------------------------
ENERGY EQUIPMENT & SERVICES (1.4%)
Dialog Group Bhd 559,000 469
------------
- ----------------------------------------------------------------------------
ENERGY SOURCES (7.0%)
Petronas Gas Bhd 856,000 1,588
Shell Refining Co. Bhd 556,000 790
------------
2,378
------------
- ----------------------------------------------------------------------------
FOOD & HOUSEHOLD PRODUCTS (3.3%)
Nestle (Malaysia) Bhd 240,000 1,087
Yeo Hiap Seng (Malaysia) Bhd 69,000 33
------------
1,120
------------
- ----------------------------------------------------------------------------
LEISURE & TOURISM (8.1%)
Genting Bhd 861,200 1,556
Tanjong plc 870,000 1,206
------------
2,762
------------
- ----------------------------------------------------------------------------
METALS -- NON-FERROUS (2.4%)
MNI Holdings Bhd 838,000 U.S.$ 812
------------
- ----------------------------------------------------------------------------
MISCELLANEOUS MATERIALS & COMMODITIES (12.9%)
Austral Enterprises Bhd 109,000 92
Golden Hope Plantations Bhd 1,017,000 931
Hap Seng Consolidated Bhd 1,970,000 1,044
IOI Corporation Bhd 1,772,000 884
Kuala Lumpur Kepong Bhd 887,000 1,432
------------
4,383
------------
- ----------------------------------------------------------------------------
MULTI-INDUSTRY (4.6%)
Sime Darby Bhd 2,271,400 1,565
------------
- ----------------------------------------------------------------------------
REAL ESTATE (2.1%)
Selangor Properties Bhd 1,109,000 454
Tan & Tan Development Bhd 818,000 253
------------
707
------------
- ----------------------------------------------------------------------------
RECREATION -- OTHER CONSUMER GOODS (1.7%)
Amway (Malaysia) Holdings Bhd 361,000 591
------------
- ----------------------------------------------------------------------------
TELECOMMUNICATIONS (5.1%)
Telekom (Malaysia) Bhd 1,029,000 1,736
------------
- ----------------------------------------------------------------------------
TRANSPORTATION -- SHIPPING (5.0%)
Malaysian International
Shipping Bhd 1,171,000 1,707
------------
- ----------------------------------------------------------------------------
UTILITIES -- ELECTRICAL & GAS (9.2%)
Powertek Bhd 660,000 700
(a)Puncak Niaga Holding Bhd 1,134,000 394
Tenaga Nasional Bhd 1,267,000 1,526
(a)YTL Power International Bhd 907,000 494
------------
3,114
------------
- ----------------------------------------------------------------------------
TOTAL MALAYSIAN COMMON STOCKS
(Cost U.S.$56,662) 30,720
------------
- ----------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- ----------------------------------------------------------------------------
SHORT-TERM INVESTMENT (15.1%)
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Repurchase Agreement (15.1%)
Chase Securities, Inc. 5.40%,
dated 6/30/98, due 7/1/98,
to be repurchased at U.S.
$5,145, collateralized by
U.S.$4,565, United States
Treasury Bonds, 6.625%,
due 2/15/27, valued at
U.S.$5,267 (Cost U.S.$5,144) U.S.$ 5,144 5,144
------------
- ----------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ----------------------------------------------------------------------------
<S> <C> <C>
FOREIGN CURRENCY ON DEPOSIT WITH
CUSTODIAN (1.0%)
Malaysian Ringgit
(Cost U.S.$312) MYR 1,327 U.S.$ 319
--------------
- ----------------------------------------------------------------------------
TOTAL INVESTMENTS (106.5%)
(Cost $62,118) 36,183
--------------
- ----------------------------------------------------------------------------
OTHER ASSETS (5.9%)
Receivable for Investments Sold U.S.$ 1,909
Dividends Receivable 87
Interest Receivable 1
Other Assets 13 2,010
------------- --------------
- ----------------------------------------------------------------------------
LIABILITIES (-12.4%)
Payable for:
Investments Purchased (3,629)
Dividends Declared (332)
Custodian Fees (52)
Professional Fees (45)
Shareholder Reporting Expenses (38)
U.S. Investment Advisory Fees (28)
Directors' Fees and Expenses (26)
Net Unrealized Loss on Foreign
Currency Exchange Contracts (25)
Administrative Fees (8)
Malaysian Investment
Advisory Fees (7)
Other Liabilities (19) (4,209)
------------- --------------
- ----------------------------------------------------------------------------
NET ASSETS (100%)
Applicable to 9,732,966, issued and
outstanding U.S.$0.01 par value
shares (20,000,000 shares authorized) U.S.$ 33,984
--------------
--------------
- ----------------------------------------------------------------------------
NET ASSETS VALUE PER SHARE U.S.$ 3.49
--------------
--------------
- ----------------------------------------------------------------------------
AT JUNE 30, 1998, NET ASSETS CONSISTED OF :
- ----------------------------------------------------------------------------
Common Stock U.S.$ 97
Capital Surplus 121,159
Accumulated Net Investment Loss (425)
Accumulated Net Realized Loss (60,975)
Unrealized Depreciation on Investments and
Foreign Currency Translations (25,872)
- ----------------------------------------------------------------------------
TOTAL NET ASSETS U.S.$ 33,984
--------------
--------------
- ----------------------------------------------------------------------------
</TABLE>
(a) -- Non-income producing
(b) -- Security valued at fair value -- see note A-1 to financial
statements.
June 30, 1998 exchange rate --
Malaysian Ringgit (MYR) 4.150= U.S. $1.00.
NOTE: Prior governmental approval for foreign investments may be required under
certain circumstances in some emerging markets, and foreign ownership
limitations may also be imposed by the charters of individual companies
in emerging markets. As a result, an additional class of shares
designated as "foreign" may be created, and offered for investment. The
"local" and "foreign" shares' market values may vary.
- ----------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at June 30, 1998,
the Fund is obligated to deliver or is to receive foreign currency in
exchange for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
CURRENCY IN NET
TO EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE LOSS
(000) (000) DATE (000) (000) (000)
- ------------ ------------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
U.S.$ 1,605 U.S.$ 1,605 07/01/98 MYR 6,555 U.S.$ 1,580 U.S.$ (25)
------------ ------------ ----------
------------ ------------ ----------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1998
(UNAUDITED)
STATEMENT OF OPERATIONS (000)
- ----------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S.$ 500
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
Less: Foreign Taxes Withheld . . . . . . . . . . . . . . . . . . . . . (123)
- ----------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 486
- ----------------------------------------------------------------------------------------------
EXPENSES
U.S. Investment Advisory Fees . . . . . . . . . . . . . . . . . . . . . 209
Malaysian Investment Advisory Fees . . . . . . . . . . . . . . . . . . 55
Administrative Fees . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Professional Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Custodian Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Shareholder Reporting Expenses . . . . . . . . . . . . . . . . . . . . 31
Directors' Fees and Expenses . . . . . . . . . . . . . . . . . . . . . 17
Transfer Agent Fees . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
- ----------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 490
- ----------------------------------------------------------------------------------------------
Net Investment Loss . . . . . . . . . . . . . . . . . . . . . . . . (4)
- ----------------------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS)
Investment Securities Sold . . . . . . . . . . . . . . . . . . . . . . (32,628)
Foreign Currency Transactions . . . . . . . . . . . . . . . . . . . . . 145
- ----------------------------------------------------------------------------------------------
Net Realized Loss . . . . . . . . . . . . . . . . . . . . . . . . . . (32,483)
- ----------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION
Appreciation on Investments . . . . . . . . . . . . . . . . . . . . . . 17,670
Appreciation on Foreign Currency Translations . . . . . . . . . . . . . 85
- ----------------------------------------------------------------------------------------------
Change in Unrealized Appreciation/Depreciation . . . . . . . . . . . 17,755
- ----------------------------------------------------------------------------------------------
Total Net Realized Loss and Change in Unrealized Appreciation/Depreciation (14,728)
- ----------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS . . . . . . . . . U.S.$ (14,732)
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1998 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1997
STATEMENT OF CHANGES IN NET ASSETS (000) (000)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Income (Loss) . . . . . . . . . . . . . . . . . . . . . . . U.S.$ (4) U.S.$ 187
Net Realized Loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (32,483) (28,726)
Change in Unrealized Appreciation/Depreciation . . . . . . . . . . . . . . 17,755 (105,245)
- ----------------------------------------------------------------------------------------------------------------------
Net Decrease in Net Assets Resulting from Operations . . . . . . . . . . . (14,732) (133,784)
- ----------------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income. . . . . . . . . . . . . . . . . . . . . . . . . . . (332) --
In Excess of Net Realized Gain . . . . . . . . . . . . . . . . . . . . . . -- (4,930)
- ----------------------------------------------------------------------------------------------------------------------
Total Distributions. . . . . . . . . . . . . . . . . . . . . . . . . . . . (332) (4,930)
- ----------------------------------------------------------------------------------------------------------------------
Total Decrease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15,064) (138,714)
Net Assets:
Beginning of Period. . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,048 187,762
- ----------------------------------------------------------------------------------------------------------------------
End of Period (including accumulated net investment loss of U.S.$425
and U.S.$89, respectively) . . . . . . . . . . . . . . . . . . . . . . . U.S.$ 33,984 U.S.$ 49,048
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
SELECTED PER SHARE DATA JUNE 30, 1998 --------------------------------------------------------------------
AND RATIOS: (UNAUDITED) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD .... U.S.$ 5.04 U.S.$ 19.29 U.S.$ 18.58 U.S.$ 18.57 U.S.$ 27.32 U.S.$ 16.28
- ----------------------------------------------------------------------------------------------------------------------------
Offering Costs .......................... -- -- -- -- -- (0.07)
- ----------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) ............ (0.00)# 0.02 (0.04) (0.03) 0.01 0.03
Net Realized and Unrealized Gain (Loss)
on Investments ........................ (1.52) (13.76) 3.57 0.88 (5.15) 14.37
- ----------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations .... (1.52) (13.74) 3.53 0.85 (5.14) 14.40
- ----------------------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income ................. (0.03) -- -- -- -- (0.13)
In Excess of Net Investment Income .... -- -- -- -- (0.02) (0.03)
Net Realized Gain ..................... -- -- (2.82) (0.74) (3.30) (0.96)
In Excess of Net Realized Gain ........ -- (0.51) -- (0.10) (0.29) (0.17)
- ----------------------------------------------------------------------------------------------------------------------------
Total Distributions ................. (0.03) (0.51) (2.82) (0.84) (3.61) (1.29)
- ----------------------------------------------------------------------------------------------------------------------------
Decrease in Net Asset Value due to Shares
Issued through Rights Offering ........ -- -- -- -- -- (2.00)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD .......... U.S. $ 3.49 U.S.$ 5.04 U.S.$ 19.29 U.S.$ 18.58 U.S.$ 18.57 U.S.$ 27.32
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF PERIOD ... U.S. $ 5.38 U.S.$ 6.56 U.S.$ 17.50 U.S.$ 17.00 U.S.$ 17.38 U.S.$ 28.00
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Market Value .......................... (17.23)% (61.09)% 18.92% 2.03% (25.94)% 103.00%+
Net Asset Value (1) ................... (29.60)% (72.89)% 19.93% 4.33% (18.87)% 98.28%+
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
RATIOS, SUPPLEMENTAL DATA:
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (THOUSANDS) ... U.S.$33,984 U.S.$49,048 U.S.$187,762 U.S.$180,674 U.S.$180,587 U.S $265,377
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets.. 2.05%* 1.35% 1.29% 1.44% 1.19% 1.60%
Ratio of Net Investment Income (Loss)
to Average Net Assets ................. (0.02)%* 0.14% (0.18)% (0.14)% 0.05% 0.14%
Portfolio Turnover Rate ................. 88% 107% 50% 33% 23% 43%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized
# Amount is less than U.S.$0.01.
+ This Return does not include the effect of rights issued in connection with
the Rights Offering.
(1) 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. This percentage is 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.
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1998
- -----------
The Malaysia Fund, Inc. (the "Fund") was incorporated on March 12, 1987 and
is registered as a diversified, closed-end management investment company under
the Investment Company Act of 1940, as amended. The Fund's investment objective
is long-term capital appreciation through investment primarily in equity
securities.
A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such policies
are consistently followed by the Fund in the preparation of its financial
statements. Generally accepted accounting principles may require management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results may differ from those estimates.
1. SECURITY VALUATION: In valuing the Fund's assets, all listed securities for
which market quotations are readily available are valued at the last sales
price on the valuation date, or if there was no sale on such date, at the
mean between the current bid and asked prices. Securities which are traded
over-the-counter are valued at the average of the mean of current bid and
asked prices obtained from reputable brokers. Short-term securities which
mature in 60 days or less are valued at amortized cost. All other
securities and assets for which market values are not readily available
(including investments which are subject to limitations as to their sale)
are valued at fair value as determined in good faith by the Board of
Directors (the "Board"), although the actual calculations may be done by
others.
2. TAXES: It is the Fund's intention to continue to qualify as a regulated
investment company and distribute all of its taxable income. Accordingly,
no provision for U.S. Federal income taxes is required in the financial
statements.
Prior to November 1, 1993, pursuant to a memorandum of understanding (the
"MOU") with the Malaysian Treasury, the Fund was exempt, contingent on
compliance with certain conditions, from payment of Malaysian income tax
for a period of eight years which commenced with the establishment of the
Fund. Effective November 1, 1993, the MOU was revised and as a result
approximately 95% of the Fund's income was exempt from payment of Malaysian
income tax of 30% through October 31, 1995. Effective November 1, 1995, all
of the Fund's income is subject to Malaysian income tax. Malaysian income
tax is included in foreign taxes withheld on the Statement of Operations.
3. REPURCHASE AGREEMENTS: In connection with transactions in repurchase
agreements, a bank as custodian for the Fund takes possession of the
underlying securities, with a market value at least equal to the amount of
the repurchase transaction, including principal and accrued interest. To
the extent that any repurchase transaction exceeds one business day, the
value of the collateral is marked-to-market on a daily basis to determine
the adequacy of the collateral. In the event of default on the obligation
to repurchase, the Fund has the right to liquidate the collateral and apply
the proceeds in satisfaction of the obligation. In the event of default or
bankruptcy by the counter-party to the agreement, realization and/or
retention of the collateral or proceeds may be subject to legal
proceedings.
4. FOREIGN CURRENCY TRANSLATION: The books and records of the Fund are
maintained in U.S. dollars. Amounts denominated in foreign currency are
translated into U.S. dollars at the mean of the bid and asked prices of
such currencies against U.S. dollars last quoted by a major bank as
follows:
- investments, other assets and liabilities at the prevailing rates of
exchange on the valuation date;
- investment transactions and investment income at the prevailing rate
of exchange on the dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange
rates and market values at the close of the period, the Fund does not
isolate that portion of the results of operations arising as a result of
changes in the foreign exchange rates from the fluctuations arising from
changes in the market prices of the securities held at period end.
Similarly, the Fund does not isolate the effect of changes in foreign
exchange rates from the fluctuations arising from changes in the market
prices of securities sold during the period. Accordingly, realized and
unrealized foreign currency gains (losses) are included in the reported net
realized and unrealized gains (losses) on investment transactions and
balances.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from sales and maturities of foreign
currency exchange contracts, disposition of foreign currencies, currency
gains or losses realized between the trade and settlement dates on
securities transactions, and the difference between the amount of
investment income and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts actually received or paid. Net
unrealized currency gains (losses) from valuing foreign currency
denominated assets and liabilities at period end exchange rates are
reflected as a component of unrealized ap-
9
<PAGE>
preciation (depreciation) on investments and foreign currency translations
in the Statement of Net Assets. The change in net unrealized currency gains
(losses) for the period is reflected in the Statements of Operations.
The Fund intends to use derivatives more actively than it has in the past. The
Fund intends to engage in transactions in futures contracts on foreign
currencies, stock indices, as well as in options, swaps and structured notes.
Consistent with the Fund's investment objectives and policies, the Fund intends
to use derivatives for non-hedging as well as hedging purposes.
Following is a description of derivative instruments and their associated risks
that the Fund intends to utilize:
5. FOREIGN CURRENCY EXCHANGE CONTRACTS: The Fund may enter into foreign
currency exchange contracts generally to attempt to protect securities and
related receivables and payables against changes in future foreign exchange
rates and, in certain situations, to gain exposure to a foreign currency. A
foreign currency exchange contract is an agreement between two parties to
buy or sell currency at a set price on a future date. The market value of
the contract will fluctuate with changes in currency exchange rates. The
contract is marked-to-market daily and the change in market value is
recorded by the Fund as unrealized gain or loss. The Fund records realized
gains or losses when the contract is closed equal to the difference between
the value of the contract at the time it was opened and the value at the
time it was closed. Risk may arise upon entering into these contracts from
the potential inability of counterparties to meet the terms of their
contracts and is generally limited to the amount of unrealized gain on the
contracts, if any, at the date of default. Risks may also arise from
unanticipated movements in the value of a foreign currency relative to U.S.
dollars.
6. FORWARD COMMITMENTS AND WHEN-ISSUED/DELAYED DELIVERY SECURITIES: The Fund
may make forward commitments to purchase or sell securities. Payment and
delivery for securities which have been purchased or sold on a forward
commitment basis can take place a month or more (not to exceed 120 days)
after the date of the transaction. Additionally, the Fund may purchase
securities on a when-issued or delayed delivery basis. Securities purchased
on a when-issued or delayed delivery basis are purchased for delivery
beyond the normal settlement date at a stated price and yield, and no
income accrues to the Fund on such securities prior to delivery. When the
Fund enters into a purchase transaction on a when-issued or delayed
delivery basis, it either establishes a segregated account in which it
maintains liquid assets in an amount at least equal in value to the Fund's
commitments to purchase such securities or denotes such securities on the
custody statement for its regular custody account. Purchasing securities on
a forward commitment or when-issued or delayed-delivery basis may involve a
risk that the market price at the time of delivery may be lower than the
agreed upon purchase price, in which case there could be an unrealized loss
at the time of delivery.
7. SWAP AGREEMENTS: The Fund may enter into swap agreements to exchange the
return generated by one security, instrument or basket of instruments for
the return generated by another security, instrument or basket of
instruments. The following summarizes swaps which may be entered into by
the Fund:
INTEREST RATE SWAPS: Interest rate swaps involve the exchange of
commitments to pay and receive interest based on a notional principal
amount. Net periodic interest payments to be received or paid are accrued
daily and are recorded in the Statement of Operations as an adjustment to
interest income. Interest rate swaps are marked-to-market daily based upon
quotations from market makers and the change, if any, is recorded as
unrealized appreciation or depreciation in the Statement of Operations.
TOTAL RETURN SWAPS: Total return swaps involve commitments to pay interest
in exchange for a market-linked return based on a notional amount. To the
extent the total return of the security, instrument or basket of
instruments underlying the transaction exceeds or falls short of the
offsetting interest obligation, the Fund will receive a payment from or
make a payment to the counterparty, respectively. Total return swaps are
marked-to-market daily based upon quotations from market makers and the
change, if any, is recorded as unrealized gains or losses in the Statement
of Operations. Periodic payments received or made at the end of each
measurement period, but prior to termination, are recorded as realized
gains or losses in the Statement of Operations.
Realized gains or losses on maturity or termination of interest rate and
total return swaps are presented in the Statement of Operations. Because
there is no organized market for these swap agreements, the value reported
in the Statement of Net Assets may differ from that which would be realized
in the event the Fund terminated its position in the agreement. Risks may
arise upon entering into these agreements from the potential inability of
the counterparties to meet the terms of the agreements and are generally
limited to the amount of net interest payments to be received and/or
favorable movements in the value of the underlying security, instrument or
basket of instruments, if any, at the date of default.
8. STRUCTURED SECURITIES: The Fund may invest in interests in entities
organized and operated solely for the purpose of restructuring the
investment characteristics of sovereign debt obligations. This type of
10
<PAGE>
restructuring involves the deposit with or purchase by an entity of
specified instruments and the issuance by that entity of one or more
classes of securities ("Structured Securities") backed by, or representing
interests in, the underlying instruments. Structured Securities generally
will expose the Fund to credit risks of the underlying instruments as well
as of the issuer of the structured security. Structured Securities are
typically sold in private placement transactions with no active trading
market. Investments in structured securities may be more volatile than
their underlying instruments, however, any loss is limited to the amount of
the original investment.
9. OVER-THE-COUNTER TRADING: Derivative instruments that may be purchased or
sold by the Fund are expected to regularly consist of instruments not
traded on an exchange. The risk of nonperformance by the obligor on such an
instrument may be greater, and the ease with which the Fund can dispose of
or enter into closing transactions with respect to such an instrument may
be less, than in the case of an exchange-traded instrument. In addition,
significant disparities may exist between bid and asked prices for
derivative instruments that are not traded on an exchange. Derivative
instruments not traded on exchanges are also not subject to the same type
of government regulation as exchange traded instruments, and many of the
protections afforded to participants in a regulated environment may not be
available in connection with such transactions.
10. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Realized gains and losses on the sale of investment
securities are determined on the specific identified cost basis. Interest
income is recognized on the accrual basis. Dividend income is recorded on
the ex-dividend date (except certain dividends which may be recorded as
soon as the Fund is informed of such dividend) net of applicable
withholding taxes where recovery of such taxes is not reasonably assured.
The amount and character of income and capital gain distributions to be
paid are determined in accordance with Federal income tax regulations which
may differ from generally accepted accounting principles. These differences
are primarily due to differing book and tax treatments for foreign currency
transactions and of the timing of the recognition of gains and losses on
securities.
Permanent book and tax basis differences relating to shareholder
distributions may result in reclassifications to undistributed net
investment income (loss), accumulated net realized gain (loss) and capital
surplus.
Adjustments for permanent book-tax differences, if any, are not reflected
in ending undistributed net investment income (loss) for the purpose of
calculating net investment income (loss) per share in the financial
highlights.
B. Morgan Stanley Asset Management Inc. (the "U.S. Adviser") provides
investment advisory services to the Fund under the terms of an Investment
Advisory Agreement (the "Agreement"). Under the Agreement, the U.S. Adviser is
paid a fee computed weekly and payable monthly at an annual rate of 0.90% of the
Fund's first $50 million of average weekly net assets, 0.70% of the Fund's next
$50 million of average weekly net assets and 0.50% of the Fund's average weekly
net assets in excess of $100 million.
C. Arab-Malaysian Consultant Sdn Bhd (the "Malaysian Adviser") provides
investment advice, research and assistance on behalf of the Fund to Morgan
Stanley Asset Management Inc. under terms of a contract. Under the contract, the
Malaysian Adviser is paid a fee computed weekly and payable monthly at an annual
rate of 0.25% of the Fund's first $50 million of average weekly net assets,
0.15% of the Fund's next $50 million of average weekly net assets and 0.10% of
the Fund's average weekly net assets in excess of $100 million.
D. The Chase Manhattan Bank, through its corporate affiliate Chase Global
Funds Services Company (the "Administrator"), provides administrative services
to the Fund under an Administration Agreement. Under the Administration
Agreement, the Administrator is paid a fee computed weekly and payable monthly
at an annual rate of 0.20% of the Fund's first $50 million of average weekly
net assets, 0.15% of the Fund's next $50 million of average weekly net assets
and 0.10% of the Fund's average weekly net assets in excess of $100 million. In
addition, the Fund is charged certain out of pocket expenses by the
Administrator. The Chase Manhattan Bank, acts as custodian for the Fund's assets
held in the United States.
E. Morgan Stanley Trust Company (the "International Custodian"), an affiliate
of the Adviser, acts as custodian for the Fund's assets held outside the United
States in accordance with a Custody Agreement. Custody fees are payable monthly
based on assets under custody, investment purchase and sales activity, an
account maintenance fee, plus reimbursement for certain out-of-pocket expenses.
During the six months ended June 30, 1998, the Fund incurred international
custodian fees of $46,000 of which that amount was payable to the International
Custodian at June 30, 1998.
F. During the six months ended June 30, 1998, the Fund made purchases and
sales totaling $40,175,000 and $37,645,000, respectively, of investment
securities other than long-term U.S. Government securities and short-term
investments. There were no purchases or sales of long-term U.S. Government
securities. At June 30, 1998, the U.S. Federal income tax cost basis of
securities was $61,806,000 and, accordingly, net unrealized depreciation
11
<PAGE>
for U.S. Federal income tax purposes was $25,942,000, of which $45,000 related
to appreciated securities and $25,987,000 related to depreciated securities. For
the six months ended June 30, 1998, the Fund incurred brokerage commissions of
$1,000 with Morgan Stanley & Co. Incorporated, an affiliate, of the Adviser. At
December 31, 1997, the Fund had a capital loss carryforward for U.S. Federal
income tax purposes of approximately $9,368,000 available to offset future
capital gains which will expire on December 31, 2005.
G. A significant portion of the Fund's net assets consist of Malaysian equity
securities and foreign currency. Changes in currency exchange rates will affect
the value of and investment income from such investments. Foreign securities may
be subject to greater price volatility, lower liquidity and less diversity than
equity securities of companies based in the United States. In addition, foreign
securities may be subject to substantial governmental involvement in the economy
and greater social, economic and political uncertainty.
H. Each Director of the Fund who is not an officer of the Fund or an
affiliated person as defined under the Investment Company Act of 1940, as
amended, may elect to participate in the Directors' Deferred Compensation Plan
(the "Plan"). Under the Plan, such Directors may elect to defer payment of a
percentage of their total fees earned as a Director of the Fund. These deferred
portions are treated, based on an election by the Director, as if they were
either invested in the Fund's shares or invested in U.S. Treasury Bills, as
defined under the Plan. The deferred fees payable, under the Plan, at June 30,
1998, totaled $14,000 and are included in Payable for Directors' Fees and
Expenses on the Statement of Net Assets.
I. During June 1998, the Board declared a distribution of $0.03 per share,
derived from net investment income, payable on July 15, 1998, to shareholders of
record on June 30, 1998. Also in June, the Board of Directors amended your
Fund's by-laws to require advance notice of any proposals to be made at
stockholders' meetings. For annual meetings the notice must be given to the
Fund's secretary at least 60 days before the anniversary date of the previous
year's annual meeting. This year's annual meeting of stockholders was held on
June 24. This provision was adopted to permit the Fund's stockholders and
Directors to consider every stockholder proposal on an informed basis and in an
organized fashion, taking into account the interests of all affected
constituencies.
J. Supplemental Proxy Information
The Annual Meeting of the Stockholders of The Malaysia Fund, Inc. was held on
June 24, 1998. The following is a summary of each proposal presented and the
total number of shares voted:
<TABLE>
<CAPTION>
VOTES IN VOTES AUTHORITY VOTES
PROPOSAL: FAVOR OF AGAINST WITHHELD ABSTAINED
- --------- --------- ------- -------- ---------
<S> <S> <C> <C> <C> <C>
1. To elect the following Directors: Michael F. Klein . . . . . . . 5,840,087 -- 145,280 --
Barton M. Biggs. . . . . . . . 5,873,701 -- 111,666 --
John A. Levin. . . . . . . . . 5,870,515 -- 114,852 --
William G. Morton, Jr. . . . . 5,861,552 -- 123,815 --
2. To ratify the selection of PricewaterhouseCoopers LLP as
independent accountants of the Fund . . . . . . . . . .. . . . . . 5,791,009 39,441 -- 54,917
</TABLE>
12
<PAGE>
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Pursuant to the Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
shareholders may elect, by instructing Boston Equiserve (the "Plan Agent") in
writing, to have all distributions automatically reinvested in Fund shares.
Participants in the Plan have the option of making additional voluntary cash
payments to the Plan Agent, semiannually, in any amount from $100 to $3,000, for
investment in Fund shares. Shareholders who do not participate in the Plan will
receive distributions in cash.
Dividend and capital gain distributions will be reinvested on the
reinvestment date in full and fractional shares. If the market price per share
equals or exceeds net asset value per share on the reinvestment date, the Fund
will issue shares to participants at net asset value. If net asset value is less
than 95% of the market price on the reinvestment date, shares will be issued at
95% of the market price. If net asset value exceeds the market price on the
reinvestment date, participants will receive shares valued at market price. The
Fund may purchase shares of its Common Stock in the open market in connection
with dividend reinvestment requirements at the discretion of the Board of
Directors. Should the Fund declare a dividend or capital gain distribution
payable only in cash, non-participants in the Plan will receive cash and the
Plan Agent will purchase Fund shares for participants in the open market as
agent for the participants.
The Plan Agent's fees for the reinvestment of dividends and distributions
will be paid by the Fund. However, each participant's account will be charged a
pro rata share of brokerage commissions incurred on any open market purchases
effected on such participant's behalf. A participant will also pay brokerage
commissions incurred on purchases made by voluntary cash payments. Although
shareholders in the Plan may receive no cash distributions, participation in the
Plan will not relieve participants of any income tax which may be payable on
such dividends or distributions.
In the case of shareholders, such as banks, brokers or nominees, which hold
shares for others who are the beneficial owners, the Plan Agent will administer
the Plan on the basis of the number of shares certified from time to time by the
shareholder as representing the total amount registered in the shareholder's
name and held for the account of beneficial owners who are participating in the
Plan.
Shareholders who do not wish to have distributions automatically reinvested
should notify the Plan Agent in writing. There is no penalty for
non-participation or withdrawal from the Plan, and shareholders who have
previously withdrawn from the Plan may rejoin at any time. Requests for
additional information or any correspondence concerning the Plan should be
directed to the Plan Agent at:
The Malaysia Fund, Inc.
Boston Equiserve
Dividend Reinvestment and Cash Purchase Plan
P.O. Box 1681
Boston, MA 02105
1-800-730-6001
13
