MERRILL LYNCH
DRAGON FUND, INC.
FUND LOGO
Quarterly Report
March 31, 1998
Investing in emerging market securities involves a number of risk
factors and special considerations, including restrictions on
foreign investments and on repatriation of capital invested in
emerging markets, currency fluctuations, and potential price
volatility and less liquidity of securities traded in emerging
markets. In addition, there may be less publicly available
information about the issuers of securities, and such issuers may
not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those to which US companies
are subject. Therefore, the Fund is designed as a long-term
investment for investors capable of assuming the risks of investing
in emerging markets. The Fund should be considered as a vehicle for
diversification and not as a complete investment program. Please
refer to the prospectus for details.
This report is not authorized for use as an offer of sale or a
solicitation of an offer to buy shares of the Fund unless
accompanied or preceded by the Fund's current prospectus. Past
performance results shown in this report should not be considered a
representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
Statements and other information herein are as dated and are subject
to change.
Merrill Lynch
Dragon Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
MERRILL LYNCH DRAGON FUND, INC.
Map Depicting the Fund's Asset Allocation As a Percentage*
of Net Assets as of March 31, 1998
India 1.2%
Indonesia 1.4%
Singapore 10.7%
Malaysia 6.9%
Thailand 4.9%
China 6.9%
Hong Kong 49.8%
South Korea 0.4%
Taiwan 3.5%
Philippines 5.3%
[FN]
*Total may not equal 100%.
Merrill Lynch Dragon Fund, Inc., March 31, 1998
DEAR SHAREHOLDER
After declining through January 1998, the "dragon" stock markets
started to recover in February following the Chinese New Year break.
Investors perceived that many of the markets had been oversold and
stocks appeared undervalued. The markets turned around sharply and
quickly, causing many of the large-capitalization, highly liquid
stocks to become fairly valued, or even overvalued, in a brief span
of time. These rapid and large increases in share prices can be
explained by the diminished size of the Asian stock markets,
especially in US dollar terms, over the last few months. Prices can
be pushed up with just a relatively small amount of money flowing
into a stock market.
For the three-month period ended March 31, 1998, Merrill Lynch
Dragon Fund, Inc.'s Class A, Class B, Class C and Class D Shares had
total investment returns of -2.95%, -3.15%, -3.19% and -3.07%,
respectively. For the same period, the unmanaged Morgan Stanley
Combined Far East Free (Ex-Japan and Ex-Taiwan) Index had a total
investment return of +10.12%. (Fund results shown do not reflect
sales charges, and would be lower if sales charges were included.
Complete performance information, including average annual total
returns, can be found on pages 4 and 5 of this report to
shareholders.) The Fund underperformed the Index by a wide margin
mainly because it was very defensively positioned at the end of last
year. The markets had surprisingly strong rallies at the end of
January and during February. In particular, the Fund's underweight
positions in Malaysia and South Korea and its high cash position
hurt its performance. Malaysia and South Korea were two of the best-
performing markets in US dollar terms during the first quarter of
1998.
Portfolio Matters
In Hong Kong, the stock market recovered on news of declining
interbank lending rates as recoveries in the Asian stock and
currency markets dispelled fears of potential currency devaluations.
The recently unveiled budget added additional optimism to investor
sentiment, since it contained proposed tax cuts and deductions for
middle-income families as well as an increase in social
expenditures. Although the property market appears to have
stabilized, there still may be more downside in the months ahead,
since prices are still above 1996 levels. Accordingly, we have
structured the Fund's Hong Kong investments defensively,
underweighting property developers and overweighting utilities and
conglomerates.
The stock markets in The People's Republic of China have been
relatively flat in recent months. China's currency has been stable
throughout the Asian currency crisis. However, economic growth is
decelerating because of slowing domestic demand and declining
exports. Unemployment will continue to rise in the next year as the
restructuring of state-owned enterprises leads to layoffs.
Infrastructure is the one area in which there will be an increase in
spending, since the government has given this a high priority. This
sector will therefore see some good growth in the next few years.
The Fund has been increasing its exposure to Chinese infrastructure-
related companies such as New World Infrastructure, Ltd. and Beijing
Datang Power Generation Co., Ltd.
The Malaysian government has been taking some steps toward shoring
up confidence in the country. The Deputy Prime Minister announced
measures to cut government spending on large infrastructure
projects, encourage mergers of financial institutions, and increase
the capitalization of banks. Malaysia is still following a fairly
loose monetary policy, with liquidity injected into the financial
system to support insolvent companies. However, an expanding money
supply may increase the risk of much higher inflation. In addition,
prices of imports, particularly foods, are rising as a result of the
currency devaluation. The Fund is underweight in the Malaysian
market, although we have increased weightings slightly.
Our Malaysian investments are highly defensive and most of the
companies have positive net cash flows and resilient earnings. We
are underweight in the banking sector and have little exposure to
the property market in Malaysia.
Unfortunately, the Singapore economy is closely linked to the
economies of its ASEAN (Association of South East Asian Nations)
neighbors through exports. As a result, recessions in other ASEAN
countries will have a negative impact on Singapore's growth. Its
banks have also lent money to companies in the region, so non-
performing loans are expected to increase significantly for
Singapore's banks. However, Singapore's economy is in much better
shape than any other ASEAN country, and will probably weather the
region's economic downturn relatively well. As with the other
countries, the Fund is underweight in the banking and property
sectors in Singapore. We have a significant position in electronics
companies, which are export-oriented and have substantial portions
of their revenues denominated in US dollars. The Fund recently
purchased shares of Creative Technology Ltd., a soundcard
manufacturer and Elec & Eltek International Co., Ltd., a maker of
printed circuit boards.
The Thai economy continues to contract. Banks are now in the process
of recapitalization and the weakest institutions have been taken
over by the government. The Thai authorities have made good-faith
efforts to restructure the economy and to pull it out of its
distress. Bankruptcy laws are starting to be put in place, which
will help lend stability to the asset markets. The real economy is
going to slow down very dramatically this year and earnings are
likely to fall significantly. However, if the government continues
to reform and restructure both the financial and economic systems,
we believe that the economy should recover next year. We have
increased the Fund's exposure to Thailand. A significant portion of
our Thai investments is in convertible bonds, which offer attractive
yields and downside protection.
The new president of South Korea, Kim Dae Jung, has worked to
fulfill the International Monetary Fund (IMF) conditions, and his
actions have been positively received by investors. The entire
country appears to be making a concerted and united effort to work
its way through the economic problems. New labor laws permit
corporations to lay off workers, and some banks have been taken over
by the government. However, the real work of corporate restructuring
has yet to be done. South Korean economic growth is likely to slow
dramatically this year, and bankruptcies will probably increase. At
this time, we are not eager to increase investments in South Korea.
Unlike Thailand and South Korea, Indonesia has still not taken
convincing steps toward restructuring its financial and economic
systems. Monopolies have not been dismantled, and bank
recapitalizations have been moving very slowly. The government
considered creating a currency board, but abandoned the idea when
the United States and IMF said they would not support it. The
Indonesian rupiah has fallen by about 75%, and most companies in the
country are technically insolvent at the current rate of exchange.
The government must take measures to demonstrate that it is serious
about tackling Indonesia's problems in order to stabilize the
currency. The Fund is currently underweight in this market since we
believe that it has probably the most distressed economy in the
region. Our exposure to the country is through one company, Gulf
Indonesia Resources, Ltd., which is an oil and gas company and earns
revenues in US dollars.
The Philippines has been relatively resilient in the past few
months, although its currency was not immune from the "Asian
contagion." The country only entered the Asian economic growth
circle recently, and therefore has not built up the same level of
excesses as some of its neighbors. In addition, it was already in an
IMF-assistance program. The Philippines is one of two countries in
Asia (China being the other) that have continued to show relatively
strong export growth during the past seven months. The Fund has
maintained a neutral weighting in the Philippines throughout the
crisis and its holdings are unchanged.
The Fund has established some positions in Taiwan through the
purchase of shares of electronics companies. Taiwan appears to have
a firmer financial foundation than many other Asian countries.
Although Taiwan's exports will decline because of slower growth
throughout Asia, we expect the electronics sector to hold up well,
since it is more dependent on US and European markets.
Outlook and Strategy
As stated in our last report to shareholders, we expect the Asian
markets to experience very deep retrenchments in the coming year.
The IMF conditions impose bitter but necessary medicine. It appears
that while some countries, such as Thailand and South Korea, are
willing to accept the stringent IMF criteria, some appear to remain
in denial. Malaysia and Indonesia fall into the latter category.
Depending on the reforms taken, 1998 could be the worst year in
terms of economic decline for many of these countries. However, the
longer a country delays reform, the longer the workout period will
be.
Merrill Lynch Dragon Fund, Inc., March 31, 1998
We believe that the region can now be divided into tiers based on
the strength of economies and reform measures. The first tier
consists of countries with stronger economies and better economic
infrastructure. Taiwan, Hong Kong and Singapore fit into this group.
The second tier consists of countries that have deep economic
problems, but their governments are taking steps to address these
problems. Thailand, South Korea and the Philippines fall into this
category. The last tier consists of countries that have deep
economic problems and have not taken sufficient steps to address
them, such as Indonesia and Malaysia. China and India have not been
included into any of these categories because their capital accounts
are still not open and they have been largely unaffected by the
recent financial crisis.
In general, we prefer to be overweight in the first and second tier
countries, and underweight in the third tier countries. We are also
overweight in China because it is more removed from the problems
plaguing the other Asian countries. Over the past quarter, we have
increased our equity positions while our cash position has decreased
to 9.3% from 13.8%. As we have discussed, our purchases have been
defensive ones. We continue to maintain our hedges on the Singapore
dollar, the Hong Kong dollar and the Malaysia ringgit.
The dragon stock markets have rallied quite strongly and stocks have
now become fairly or even over valued in local currency terms. It is
unlikely that the markets will continue to run up so strongly in the
next few months. A correction is expected to occur, at which time we
may increase our equity investments, if valuations should become
more attractive.
In Conclusion
We thank you for your investment in Merrill Lynch Dragon Fund, Inc.,
and we look forward to reviewing our outlook and strategy with you
again in our next report to shareholders.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Kara Tan Bhala)
Kara Tan Bhala
Senior Vice President and
Portfolio Manager
April 30, 1998
PERFORMANCE DATA
About Fund
Performance
Investors are able to purchase shares of the Fund through the
Merrill Lynch Select Pricing SM System, which offers four pricing
alternatives:
* Class A Shares incur a maximum initial sales charge (front-end
load) of 5.25% and bear no ongoing distribution or account
maintenance fees. Class A Shares are available only to eligible
investors, as detailed in the Fund's prospectus. If you were a Class
A shareholder prior to October 21, 1994, your Class A Shares were
redesignated to Class D Shares on October 21, 1994. However, in the
case of certain eligible investors, the shares were simultaneously
exchanged for Class A Shares.
* Class B Shares are subject to a maximum contingent deferred sales
charge of 4% if redeemed during the first year, decreasing 1% each
year thereafter to 0% after the fourth year. In addition, Class B
Shares are subject to a distribution fee of 0.75% and an account
maintenance fee of 0.25%. These shares automatically convert to
Class D Shares after approximately 8 years. (There is no initial
sales charge for automatic share conversions.)
* Class C Shares are subject to a distribution fee of 0.75% and an
account maintenance fee of 0.25%. In addition, Class C Shares are
subject to a 1% contingent deferred sales charge if redeemed within
one year of purchase.
* Class D Shares incur a maximum initial sales charge of 5.25% and
an account maintenance fee of 0.25% (but no distribution fee).
None of the past results shown should be considered a representation
of future performance. Figures shown in the "Average Annual Total
Return" tables assume reinvestment of all dividends and capital
gains distributions at net asset value on the ex-dividend date.
Investment return and principal value of shares will fluctuate so
that shares, when redeemed, may be worth more or less than their
original cost. Dividends paid to each class of shares will vary
because of the different levels of account maintenance, distribution
and transfer agency fees applicable to each class, which are
deducted from the income available to be paid to shareholders.
<TABLE>
Recent
Performance
Results*
<CAPTION>
12 Month 3 Month Since Inception
Total Return Total Return Total Return
<S> <C> <C> <C>
ML Dragon Fund, Inc. Class A Shares -39.11% -2.95% -37.43%
ML Dragon Fund, Inc. Class B Shares -39.74 -3.15 + 5.45
ML Dragon Fund, Inc. Class C Shares -39.78 -3.19 -39.53
ML Dragon Fund, Inc. Class D Shares -39.28 -3.07 +10.30
<FN>
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included. Total
investment returns are based on changes in net asset values for the
periods shown, and assume reinvestment of all dividends and capital
gains distributions at net asset value on the ex-dividend date. The
Fund's inception dates are:Class A Shares and Class C Shares,
10/21/94; and Class B Shares and Class D Shares, 5/29/92.
</TABLE>
Average Annual
Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 3/31/98 -39.11% -42.31%
Inception (10/21/94) through 3/31/98 -12.74 -14.10
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 3/31/98 -39.74% -41.70%
Five Years Ended 3/31/98 - 1.18 - 1.18
Inception (5/29/92) through 3/31/98 + 0.91 + 0.91
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Year Ended 3/31/98 -39.78% -40.27%
Inception (10/21/94) through 3/31/98 -13.60 -13.60
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Year Ended 3/31/98 -39.28% -42.47%
Five Years Ended 3/31/98 - 0.41 - 1.48
Inception (5/29/92) through 3/31/98 + 1.69 + 0.76
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
Merrill Lynch Dragon Fund, Inc., March 31, 1998
<TABLE>
SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
Shares Held/ Percent of
COUNTRIES Industries Face Amount Long-Term Investments Cost Value Net Assets
<S> <S> <C> <S> <C> <C> <C>
China Appliances 2,531,000 Guangdong Kelon Electrical
Holdings Company Limited
(Class H) $ 2,584,163 $ 2,939,985 0.6%
Conglomerates 4,540,014 Guangdong Investments, Ltd. 3,278,086 2,094,805 0.4
1,882,000 Shanghai Industrial Holdings Ltd. 9,192,085 7,699,974 1.5
------------ ------------ ------
12,470,171 9,794,779 1.9
Infrastructure 441,800 New World Infrastructure, Ltd. 1,230,149 1,066,296 0.2
US$ 8,797,000 New World Infrastructure, Ltd.,
5% due 7/15/2001 (b) 11,209,632 9,324,820 1.8
------------ ------------ ------
12,439,781 10,391,116 2.0
Mining 166,120 Yanzhou Coal Mining Co.
Ltd. (ADR)* 2,616,390 2,657,920 0.5
Telecommunications 3,722,000 China Telecom (Hong Kong)
Limited 5,351,135 7,541,998 1.5
Utilities--Electric 4,652,000 Beijing Datang Power Generation
Co., Ltd. (Class H) 2,224,572 2,146,477 0.4
Total Long-Term Investments
in China 37,686,212 35,472,275 6.9
Hong Kong Banking 1,958,764 HSBC Holdings, Ltd. 31,710,240 59,915,729 11.6
Conglomerates 4,035,000 Citic Pacific Ltd. 16,799,374 14,269,360 2.8
US$ 5,980,000 First Pacific Company Ltd.,
2% due 3/27/2002 (b) 3,962,944 4,903,600 0.9
6,292,000 Hutchison Whampoa, Ltd. 39,994,554 44,258,389 8.6
4,679,000 Swire Pacific Ltd. 'B' 6,489,889 4,499,038 0.9
------------ ------------ ------
67,246,761 67,930,387 13.2
Infrastructure 3,319,000 Cheung Kong Infrastructure
Holdings Ltd. 9,006,496 9,895,315 1.9
Insurance 20,741,000 National Mutual Asia, Ltd. 11,498,408 17,132,473 3.3
Publishing & 8,188,000 South China Morning Post
Broadcasting Holdings Ltd. 4,992,818 5,495,302 1.1
4,427,000 Television Broadcasts Ltd. 17,750,151 11,656,014 2.3
------------ ------------ ------
22,742,969 17,151,316 3.4
Real Estate 2,229,000 Cheung Kong Holdings Ltd. 15,650,086 15,822,793 3.1
1,879,142 New World Development Co., Ltd. 12,646,609 6,633,265 1.3
US$ 5,150,000 New World Development Co., Ltd.,
4.375% due 12/11/2000 (b) 5,822,455 4,789,500 0.9
1,532,100 Sun Hung Kai Properties, Ltd. 15,609,682 10,430,856 2.0
------------ ------------ ------
49,728,832 37,676,414 7.3
Telecommunications 4,449,000 Hong Kong Telecommunications Ltd. 9,188,038 9,187,403 1.8
Utilities-- 1,763,000 CLP Holdings Limited (a) 9,269,745 8,874,161 1.7
Electric & Gas 17,186,198 Hong Kong and China Gas
Company Ltd. 21,592,124 28,835,903 5.6
------------ ------------ ------
30,861,869 37,710,064 7.3
Total Long-Term Investments in
Hong Kong 231,983,613 256,599,101 49.8
India Finance 52 Housing Development Finance
Corp., Ltd. 5,098 4,187 0.0
Telecommunications 348,000 Mahanagar Telephone Nigam Ltd.
(GDR)** 4,161,384 5,976,900 1.2
Total Long-Term Investments
in India 4,166,482 5,981,087 1.2
Indonesia Oil & Gas 404,300 Gulf Indonesia Resources, Ltd. 8,334,119 7,277,400 1.4
Total Long-Term Investments in
Indonesia 8,334,119 7,277,400 1.4
Malaysia Banking 7,049,465 Public Bank BHD (Foreign) 9,983,397 4,175,303 0.8
Conglomerates 3,564,000 Sime Darby BHD 4,529,459 4,005,818 0.8
Construction 403,000 I.J.M. Corp. BHD 830,318 234,251 0.1
Consumer Products 1,230,000 Amway (Malaysia) Holdings BHD 1,994,644 2,676,860 0.5
Food 1,409,700 Nestle Malaysia BHD 6,139,518 7,844,612 1.5
Gaming/Leisure 1,747,000 Berjaya Sports ToTo BHD 5,342,419 4,764,545 0.9
868,000 Genting BHD 3,076,628 2,988,981 0.6
620,000 Resorts World BHD 1,496,549 1,374,931 0.3
------------ ------------ ------
9,915,596 9,128,457 1.8
Publishing & 2,643,000 Star Publications Malaysia BHD 7,556,692 4,550,620 0.9
Broadcasting
Telecommuni- US$ 2,095,000 Telekom Malaysia BHD, 4% due
cations 10/03/2004 (b) 1,694,076 1,691,713 0.3
Utilities--Electric 203,000 YTL Power International BHD 191,938 191,256 0.0
Wire & Cable US$ 1,390,000 Leader Universal Holdings BHD,
2.75% due 5/05/2004 (b) 1,013,662 986,900 0.2
Total Long-Term Investments
in Malaysia 43,849,300 35,485,790 6.9
Philippines Conglomerates 1,421,816 Benpres Holdings Corp. (GDR)** 9,020,683 4,952,043 1.0
Infrastructure US$ 1,084,000 International Container
Terminal Services,
Inc. (ICTSI), 1.75% due
3/13/2004 (b) 699,047 915,980 0.2
Real Estate 12,810,987 Ayala Land, Inc. 'B' 10,878,228 6,190,112 1.2
Retail 53,264,170 SM Prime Holdings, Inc. 9,921,185 10,435,659 2.0
Utilities-- 1,351,993 Manila Electric Co. (MERALCO) 'B' 6,517,356 4,438,632 0.9
Electric & Gas
Total Long-Term Investments in
the Philippines 37,036,499 26,932,426 5.3
</TABLE>
Merrill Lynch Dragon Fund, Inc., March 31, 1998
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<CAPTION>
Shares Held/ Percent of
COUNTRIES Industries Face Amount Long-Term Investments Cost Value Net Assets
<S> <S> <C> <S> <C> <C> <C>
Singapore Airlines 1,687,000 Singapore Airlines Ltd.
(Foreign) $ 13,823,209 $ 12,027,588 2.3%
Banking 860,000 Development Bank of
Singapore Ltd. (Foreign) 12,098,200 7,265,704 1.4
627,704 United Overseas Bank (Foreign) 5,384,413 3,482,921 0.7
------------ ------------ ------
17,482,613 10,748,625 2.1
Electronics 213,000 Creative Technology Ltd. 5,145,058 4,765,875 0.9
1,311,000 Elec & Eltek International
Co., Ltd. 7,506,983 7,800,450 1.5
81,000 Natsteel Electronics Ltd. 159,130 157,681 0.0
624,000 Venture Manufacturing
(Singapore) Ltd. 2,024,295 2,321,141 0.5
------------ ------------ ------
14,835,466 15,045,147 2.9
Publishing & 1,054,486 Singapore Press Holdings Ltd.
Broadcasting (Foreign) 10,189,672 12,094,233 2.4
Real Estate 1,088,000 City Development Ltd. 7,425,404 5,362,430 1.0
Total Long-Term Investments
in Singapore 63,756,364 55,278,023 10.7
South Korea Electronics 44,900 Samsung Display Devices Co., Ltd. 2,468,997 2,108,743 0.4
US$ 160,000 Samsung Display Devices Co.,
Ltd., 0.25% due 3/12/2006 (b) 132,000 146,400 0.0
Total Long-Term Investments in
South Korea 2,600,997 2,255,143 0.4
Taiwan Electronics 131,200 Advanced Semiconductor Engineering,
Inc. (GDR)** 4,058,625 4,690,400 0.9
505,000 Compeq Manufacturing Co., Ltd. 4,809,674 4,572,713 0.9
645,000 Hon Hai Precision Industry 4,644,877 3,873,933 0.8
184,900 Taiwan Semiconductor Manufacturing
Company Ltd. (ADR)* 4,809,614 4,784,287 0.9
Total Long-Term Investments
in Taiwan 18,322,790 17,921,333 3.5
Thailand Banking US$ 1,986,000 Bangkok Bank Public Co. Ltd.,
1.50% due 8/07/2006 (b) 1,694,517 1,866,840 0.4
Industrial US$ 4,944,000 Banpu Public Co. Ltd., 2.75%
due 4/10/2003 (b) 3,235,953 3,806,880 0.7
US$ 2,977,000 Cogeneration PLC, 2.50% due
2/12/2007 (b) 2,012,360 2,411,370 0.5
------------ ------------ ------
5,248,313 6,218,250 1.2
Oil & Gas 676,500 PTT Exploration and Production
Public Co., Ltd. (Foreign) 6,891,503 7,696,913 1.5
Publishing & 908,000 BEC World Public Company Limited 4,159,332 4,632,653 0.9
Broadcasting
Telecommunications 622,600 Advanced Info Service Public
Co., Ltd. 3,323,449 4,860,092 0.9
Total Long-Term Investments
in Thailand 21,317,114 25,274,748 4.9
Total Long-Term Investments 469,053,490 468,477,326 91.0
Face Amount Short-Term Investments
United Commercial US$ 18,000,000 Atlantic Asset Securitization
States Paper*** Corp., 5.57% due 4/15/1998 17,961,010 17,961,010 3.5
10,000,000 Countrywide Home Loans, 5.60%
due 4/07/1998 9,990,667 9,990,667 1.9
13,104,000 General Motors Acceptance
Corp., 6.13% due 4/01/1998 13,104,000 13,104,000 2.5
7,000,000 Morgan Stanley Group Inc.,
5.55% due 4/01/1998 7,000,000 7,000,000 1.4
Total Short-Term Investments 48,055,677 48,055,677 9.3
Total Investments $517,109,167 516,533,003 100.3
============
Unrealized Depreciation on Forward Foreign Exchange Contracts++ (1,509,707) (0.3)
Liabilities in Excess of Other Assets (86,168) (0.0)
------------ ------
Net Assets $514,937,128 100.0%
============ ======
Net Asset Value: Class A--Based on net assets of $22,034,526
and 2,576,800 shares outstanding $ 8.55
============
Class B--Based on net assets of $356,089,723
and 42,854,974 shares outstanding $ 8.31
============
Class C--Based on net assets of $26,167,311
and 3,195,429 shares outstanding $ 8.19
============
Class D--Based on net assets of $110,645,568
and 12,965,846 shares outstanding $ 8.53
============
<FN>
*American Depositary Receipts (ADR).
**Global Depositary Receipts (GDR).
***Commercial Paper is traded on a discount basis; the interest
rates shown are the discount rates paid at the time of purchase
by the Fund.
(a)Formerly known as China Light & Power Co.
(b)Convertible security.
++Forward foreign exchange contracts as of March 31, 1998 were as
follows:
Unrealized
Expiration Appreciation
Foreign Currency Sold Date Depreciation
HK$ 722,201,000 September 1998 $(1,919,725)
MYR 35,767,324 May 1998 305,349
SG$ 51,584,000 November 1998 104,669
Total Unrealized Depreciation on Forward
Foreign Exchange Contracts--Net
(US$ Commitment--$132,584,762) $(1,509,707)
===========
</TABLE>
Merrill Lynch Dragon Fund, Inc., March 31, 1998
EQUITY PORTFOLIO CHANGES
For the Quarter Ended March 31, 1998
Additions
Advanced Semiconductor Engineering, Inc. (GDR)
Amway (Malaysia) Holdings BHD
Beijing Datang Power Generation Co., Ltd. (Class H)
CLP Holdings Ltd.
Cheung Kong Infrastructure Holdings Ltd.
Compeq Manufacturing Co., Ltd.
Creative Technology Ltd.
Elec & Eltek International Co., Ltd.
Genting BHD
Guangdong Kelon Electrical Holdings Company Limited (Class H)
Hon Hai Precision Industry
Hong Kong Telecommunications Ltd.
Natsteel Electronics Ltd.
Resorts World BHD
Samsung Display Devices Co., Ltd.
Sime Darby BHD
Taiwan Semiconductor Manufacturing Company Ltd. (ADR)
Venture Manufacturing (Singapore) Ltd.
Yanzhou Coal Mining Co. Ltd. (ADR)
*YTL Corporation BHD
YTL Power International BHD
Deletions
Beijing Enterprises Holdings Limited
China Resources Enterprise Ltd.
DBS Land Ltd.
Dah Sing Financial Holdings Ltd.
First Pacific Company Ltd.
Guoco Group, Ltd.
International Container Terminal Services, Inc. (ICTSI)
Malayan Banking BHD
P.T. Citra Marga Nusaphala Persada (Foreign)
P.T. Hanjaya Mandala Sampoerna (Foreign)
P.T. Telekomunikasi Indonesia (Series B)(ADR)
Swire Pacific Ltd. 'A'
*YTL Corporation BHD
[FN]
*Added and deleted in the same quarter.
PORTFOLIO INFORMATION
Investments
As of 3/31/98
Ten Largest Equity Holdings Percent of
Represented in the Portfolio Net Assets
HSBC Holdings, Ltd. 11.6%
Hutchison Whampoa, Ltd. 8.6
Hong Kong and China Gas Company Ltd. 5.6
National Mutual Asia, Ltd. 3.3
Cheung Kong Holdings Ltd. 3.1
Citic Pacific Ltd. 2.8
Singapore Press Holdings Ltd. (Foreign) 2.4
Singapore Airlines Ltd. (Foreign) 2.3
Television Broadcasts Ltd. 2.3
SM Prime Holdings, Inc. 2.0
Ten Largest Industries Percent of
Represented in the Portfolio Net Assets
Conglomerates 16.9%
Banking 14.9
Real Estate 9.5
Utilities--Electric & Gas 8.2
Publishing & Broadcasting 7.6
Electronics 6.8
Telecommunications 5.7
Infrastructure 4.1
Insurance 3.3
Oil &Gas 2.9
OFFICERS AND DIRECTORS
Arthur Zeikel, President and Director
Donald Cecil, Director
Edward H. Meyer, Director
Charles C. Reilly, Director
Richard R. West, Director
Edward D. Zinbarg, Director
Terry K. Glenn, Executive Vice President
Norman R. Harvey, Senior Vice President
Kara W.Y. Tan Bhala, Senior Vice President and
Portfolio Manager
Donald C. Burke, Vice President
Gerald M. Richard, Treasurer
James W. Harshaw, Secretary
Custodian
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02109
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
