MERRILL LYNCH
DRAGON FUND, INC.
FUND LOGO
Quarterly Report
March 31, 1999
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.
Asset Allocation
As a Percentage* of
Net Assets as of
March 31, 1999
INDONESIA 1.1%
SINGAPORE 12.6%
MALAYSIA 2.8%
THAILAND 5.7%
CHINA 2.3%
HONG KONG 35.8%
SOUTH KOREA 15.7%
TAIWAN 11.3%
PHILIPPINES 5.9%
[FN]
*Total may not equal 100%.
Merrill Lynch Dragon Fund, Inc., March 31, 1999
DEAR SHAREHOLDER
For the quarter ended March 31, 1999, Merrill Lynch Dragon Fund,
Inc.'s Class A, Class B, Class C and Class D Shares had total
returns of +1.66%, +1.27%, +1.29% and +1.52%, respectively.
(Complete performance information can be found on pages 5 and 6 of
this report to shareholders.)
Investment Environment
The dragon economies continued with the slow work of repair and
reconstruction throughout the quarter ended March 31, 1999. During
the period, there were signs that the region's economic contraction
is moderating. Certain macroeconomic indicators are recovering and
there has been a huge buildup in Asia's current account surpluses.
Some economists forecast a resumption of positive year-over-year
gross domestic product (GDP) growth in the second quarter of 1999
for most Asian countries. However, Hong Kong will probably lag the
recovery, since it still has to deal with the deflationary effects
of its currency peg.
Along with record-low interest rates, government fiscal spending is
also on the rise. After years of running surpluses, all the dragon
economies are currently running fiscal deficits, helping to give
growth a boost during 1999. Industrial production numbers are up on
a year-over-year basis in India, South Korea and Singapore. From a
quarter-to-quarter standpoint, they are up in Taiwan and Thailand.
The spending patterns of local consumers are beginning to shift for
the better. Auto sales are rising on a quarter-to-quarter basis as
well as from a more volatile month-to-month standpoint. Airline
travel offers another sign of a renewal in consumer spending. Part
of the recovery of private consumption is attributable to a rise in
Asia's savings ratio in 1998 from 1997.
External accounts continue to be strong for the dragon countries.
Economists estimate that the current account surpluses in the region
this year will be around 5% of GDP. This reversal is dramatic and
provides support for the dragon currencies. It was notable that when
the Brazilian currency devalued in January, the Asian currencies
barely moved. Current account surpluses and large foreign reserves
will help cushion dragon countries from the potential economic
dislocations that may arise globally, and will continue to provide a
buffer against upward pressure on interest rates.
Investment Outlook
Hong Kong continues to show signs of a slowdown. Unemployment is
generally expected to rise in 1999. The currency peg limits the
options for policymakers. As a result, real interest rates in Hong
Kong remain quite high by Asian standards and the country is still
experiencing deflation. Moreover, the slowdown in exports and
domestic demand experienced by The People's Republic of China have a
negative effect on Hong Kong's growth.
While GDP growth is being revised up for the rest of Asia, Taiwan's
is expected to fall. Taiwan's economy is still in the midst of
tightening credit crunch. Financial institutions are calling back
loans and bad debts in the banking sector are rising. In an effort
to counter the credit contraction, the central bank has been cutting
interest rates and bank reserve requirements. In the short term this
will mean more liquidity in the system, which will probably flow
back into the stock market. Another factor that may mitigate the
slowdown in Taiwan is a recovery in Asian demand, which may lend
support to Taiwan's export sector.
We expect The People's Republic of China's economy to experience
further slowing this year. The country is suffering from three main
problems. First, there is excess supply of many goods. Second,
domestic demand has been very weak because of corporate
restructuring and bankruptcies. Third, the country is undergoing
deflation. However, despite these problems, China must continue its
reform process by cleaning up its banking sector and restructuring
its state-owned enterprises. Strong government fiscal spending has
been supporting the economy, but the budget deficit cannot grow
indefinitely. In the latest National Peoples Congress, Premier Zhu
Rongji talked about these problems openly, which signals the public
acknowledgment of China's problems. If reform is to take place at a
faster pace, the stability of the renminbi may be in doubt by the
end of the year. A devaluation may not necessarily be negative for
the economy. It would support the export sector, which is the one of
the main drivers of the economy at the current time. It would also
be positive for Hong Kong, since an increase in exports would be
good for its ports and services industries.
The economy in South Korea is improving, thus confirming investors'
views that a recovery is underway and that GDP growth will continue
to surpass expectations. Another positive factor for the economy is
the continued decline in inventories. Restocking these depleted
inventories will provide strong support for industrial production.
The other area that is poised for positive surprises is domestic
demand. Wholesale and retail sales posted the first growth since the
outbreak of the currency crisis.
In Singapore, companies are focusing on enhancing shareholder value
and improving returns on assets. Firms have cut costs aggressively,
and the government has introduced legislation to allow for better
management of corporate balance sheets. Unlike Hong Kong, Singapore
can set its own monetary policy. As a result, nominal rates of
interest have declined sharply.
In Indonesia, most investors are awaiting the results of the
elections scheduled to take place in June. The likely outcome will
be a coalition government, since there is no single party expected
to gain a majority in parliament. The important outcome of the
elections will be the choice of the president. We expect elections
to take place relatively smoothly. However, if a coalition
government is the result, it will be more difficult to arrive at an
economic policy consensus. Meanwhile, bank reconstruction is making
some progress, since the government has moved to close down seven
banks and recapitalize several others.
Interest rates in the Philippines have continued to fall over the
past quarter. Export figures have also been the strongest in the
region. We expect the economy to recover modestly in 1999.
Fortunately, the country does not have the same level of banking
problems as other dragon economies that were impacted by the
currency crisis.
Malaysia has removed its strict capital controls and replaced them
with a system of exit taxes. This move may have made it easier
officially for money to be repatriated from the country, but the
process is still quite cumbersome. The International Finance
Corporation has reinstalled Malaysia into its indexes as a result of
the removal of capital controls. In terms of the economy, there are
signs of improvement. Bank recapitalization is continuing apace and
corporate debt restructuring is also taking place.
The Thai economy seems to be mending. Industrial production numbers
have been rising on a quarter-to-quarter and month-on-month basis.
Nominal and real interest rates have contracted sharply. Nominal and
inflation-adjusted interest rates have declined to levels that are
lower than those prevailing before the currency crisis. In the
political arena, the passage of the bankruptcy and foreclosure laws
bodes well for easing the economic reform logjam.
In summary, we expect the dragon countries to continue on their
recovery paths this year, with momentum building more toward the end
of the year and then moving apace next year. It is encouraging to
see that as governments are restructuring the economies on a
macroeconomic level, there is also micro-level corporate
restructuring taking place. For this reason, earnings growth is
likely to improve next year, as corporations dispose of assets,
restructure debt and streamline operations. This activity should
prove positive for their bottom lines. Nevertheless, there is much
more work to be done in terms of bank recapitalization. However, the
initial steps have been taken. If this trend continues, it then
becomes a matter of time for Asia to clean up its debt problem.
Investment Strategy
We made no major shifts in the Fund's asset allocation during the
March quarter. Our most significant change was to increase our
weighting in Taiwan while selling some positions in Thailand. We
have also started to modestly increase investments in Indonesia. In
addition, we decreased the Fund's Chinese investments, since we
believe that this may be a difficult year for the economy. Within
the country portfolios, we have started to build some holdings in
consumer-related stocks, since we have seen the beginning of a
recovery in this sector. In Malaysia, we are trying to sell our
remaining investments (2.8% of net assets as of March 31, 1999), but
are still working through the administrative details.
Merrill Lynch Dragon Fund, Inc., March 31, 1999
In Conclusion
We expect to remain fully weighted in equities in the near term. We
will shift our portfolio of stocks in each country toward positions
that will benefit from the recovery in various sectors of the
economy. We believe that all the countries in non-Japan Asia are in
a recovery trend; therefore, it is difficult to differentiate medium-
term country performance. Therefore at this stage of the cycle,
stock picking will become more important.
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,
(Terry K. Glenn)
Terry K. Glenn
President and Director
(Kara Tan Bhala)
Kara Tan Bhala
Senior Vice President and
Portfolio Manager
April 28, 1999
After more than 20 years of service, Arthur Zeikel recently retired
as Chairman of Merrill Lynch Asset Management, L.P. (MLAM). Mr.
Zeikel served as President of MLAM from 1977 to 1997 and as Chairman
since December 1997. Mr. Zeikel is one of the country's most
respected leaders in asset management and presided over the growth
of Merrill Lynch's asset management business. During his tenure,
client assets under management grew from $300 million to over $500
billion. Mr. Zeikel will remain on Merrill Lynch Dragon Fund, Inc.'s
Board of Directors. We are pleased to announce that Terry K. Glenn
has been elected President and Director of the Fund. Mr. Glenn has
held the position of Executive Vice President of MLAM since 1983.
Mr. Zeikel's colleagues at MLAM join the Fund's Board of Directors
in wishing him well in his retirement from Merrill Lynch and are
pleased that he will continue as a member of the Fund's Board of
Directors.
Merrill Lynch Dragon Fund, Inc., March 31, 1999
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 "Recent Performance
Results" and "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 -12.24% +1.66% -45.09%
ML Dragon Fund, Inc. Class B Shares -13.28 +1.27 - 8.55
ML Dragon Fund, Inc. Class C Shares -13.21 +1.29 -47.52
ML Dragon Fund, Inc. Class D Shares -12.42 +1.52 - 3.40
<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 periods areClass A Shares & Class C Shares, from
10/21/94 to 3/31/99 and Class B Shares & Class D Shares, from
5/29/92 to 3/31/99.
</TABLE>
Merrill Lynch Dragon Fund, Inc., March 31, 1999
PERFORMANCE DATA (concluded)
Average Annual Total Return
Average Annual
Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 3/31/99 -12.24% -16.85%
Inception (10/21/94) through 3/31/99 -12.63 -13.68
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 3/31/99 -13.28% -16.73%
Five Years Ended 3/31/99 - 9.61 - 9.61
Inception (5/29/92) through 3/31/99 - 1.30 - 1.30
[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 3/31/99 -13.21% -14.07%
Inception (10/21/94) through 3/31/99 -13.51 -13.51
[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 3/31/99 -12.42% -17.02%
Five Years Ended 3/31/99 - 8.86 - 9.84
Inception (5/29/92) through 3/31/99 - 0.50 - 1.29
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
<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 1,037,000 Guangdong Kelon Electrical Holdings
Company Limited 'H' $ 1,056,898 $ 756,065 0.3%
Infrastructure 3,950,000 Jiangsu Expressway Company Ltd. 'H' 979,672 774,770 0.3
US$ 927,000 New World Infrastructure Limited,
5% due 7/15/2001 (a) 1,199,380 787,950 0.3
4,197,000 Zhejiang Expressway Co. Ltd. 'H' 752,949 714,899 0.2
------------ ------------ ------
2,932,001 2,277,619 0.8
Mining 72,520 Yanzhou Coal Mining Co.,
Ltd. (ADR)* 1,142,190 575,628 0.2
Telecommunications 78,450 China Telecom (Hong Kong)
Limited (ADR)* 3,109,371 2,618,269 1.0
Total Long-Term Investments
in China 8,240,460 6,227,581 2.3
Hong Kong Banking 619,867 HSBC Holdings PLC 13,289,341 19,517,324 7.3
83,200 HSBC Holdings PLC (GBP) 2,235,921 2,683,010 1.0
------------ ------------ ------
15,525,262 22,200,334 8.3
Conglomerates 2,715,000 Hutchison Whampoa Limited 20,216,897 21,371,332 8.0
Consumer Products 302,900 VTech Holdings Limited 1,291,698 873,592 0.3
Electronics 1,052,000 Johnson Electric Holdings Limited 2,127,562 2,966,191 1.1
Insurance 1,965,000 AXA China Region Ltd. 1,866,483 1,381,946 0.5
Publishing & 2,842,000 South China Morning Post
Broadcasting Holdings Ltd. 1,864,697 1,576,974 0.6
662,000 Television Broadcasts Ltd. 2,449,123 2,404,741 0.9
------------ ------------ ------
4,313,820 3,981,715 1.5
Real Estate 2,057,000 Cheung Kong (Holdings) Ltd. 10,616,590 15,660,954 5.9
875,588 Sun Hung Kai Properties Ltd. 6,641,044 6,525,048 2.4
------------ ------------ ------
17,257,634 22,186,002 8.3
Retail 2,000,000 Dairy Farm International 2,504,925 2,320,000 0.9
Telecommunications 351,052 Hong Kong Telecommunications
Ltd. (ADR)* 6,769,755 6,867,455 2.6
Utilities-- 1,245,000 CLP Holdings Limited 4,914,166 5,976,463 2.2
Electric & Gas 3,949,817 Hong Kong and China Gas
Company Ltd. 6,047,546 5,581,141 2.1
------------ ------------ ------
10,961,712 11,557,604 4.3
Total Long-Term Investments
in Hong Kong 82,835,748 95,706,171 35.8
Indonesia Food 1,350,000 PT Indofood Sukses Makmur Tbk 762,668 847,674 0.3
Telecommunications 350,000 PT Telekomunikasi Indonesia (ADR)* 3,025,846 2,231,250 0.8
Total Long-Term Investments
in Indonesia 3,788,514 3,078,924 1.1
Malaysia++ Consumer Products 1,208,000 Amway (Malaysia) Holdings BHD 1,966,021 1,843,789 0.7
Food 278,700 Nestle (Malaysia) BHD 1,420,071 975,450 0.4
Publishing & 761,000 Star Publications (Malaysia) 1,275,461 1,021,342 0.4
Broadcasting
Tobacco 319,000 Rothmans of Pall Mall (Malaysia) BHD 1,348,609 1,888,816 0.7
Utilities-- 2,444,000 YTL Power International BHD 2,233,583 1,749,389 0.6
Electric & Gas
Total Long-Term Investments
in Malaysia 8,243,745 7,478,786 2.8
Philippines Banking 240,000 Metropolitan Bank & Trust Company 1,591,117 1,911,917 0.7
Conglomerates 14,579,320 Benpres Holdings Corp. 3,886,185 2,266,216 0.8
Consumer Products 750,000 San Miguel Corporation 'B' 1,332,717 1,253,238 0.5
Real Estate 7,814,184 Ayala Land, Inc. 6,240,391 2,277,450 0.9
Retail 12,982,170 SM Prime Holdings, Inc. 2,836,241 2,690,605 1.0
Telecommunications 100,000 Philippine Long Distance
Telephone Company (ADR)* 2,658,633 2,587,500 1.0
Utilities-- 802,893 Manila Electric Company 'B' 4,559,961 2,662,443 1.0
Electric & Gas
Total Long-Term Investments
in the Philippines 23,105,245 15,649,369 5.9
</TABLE>
Merrill Lynch Dragon Fund, Inc., March 31, 1999
<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 971,000 Singapore Airlines Ltd. 'Foreign' $ 8,475,957 $ 7,032,155 2.6%
Banking 672,000 Development Bank of Singapore
Limited 'Foreign' 7,406,142 5,100,348 1.9
365,000 Oversea-Chinese Banking
Corporation Ltd. 'Foreign' 2,362,933 2,474,218 0.9
819,000 Overseas Union Bank Ltd. 'Foreign' 3,333,434 2,894,496 1.1
------------ ------------ ------
13,102,509 10,469,062 3.9
Electronics 378,000 Elec & Eltek International
Company Ltd. 2,282,845 1,391,040 0.5
887,000 Natsteel Electronics Ltd. 1,669,865 2,425,632 0.9
------------ ------------ ------
3,952,710 3,816,672 1.4
Engineering 3,092,000 Singapore Technologies
Engineering Ltd. 2,679,498 2,794,623 1.1
Internet 24,000 Pacific Internet Ltd. 408,000 1,383,000 0.5
Publishing & 533,837 Singapore Press Holdings Ltd. 6,645,512 5,907,466 2.2
Broadcasting
Telecommunications 1,586,000 Singapore Telecommunications, Ltd. 2,422,548 2,260,464 0.9
Total Long-Term Investments
in Singapore 37,686,734 33,663,442 12.6
South Korea Consumer Products 36,340 Cheil Jedang Corp. 1,372,650 1,366,455 0.5
Electronics 187,708 Samsung Display Devices Co., Ltd. 7,377,388 9,232,294 3.5
137,118 Samsung Electronics Co., Ltd. 7,158,098 10,624,967 4.0
------------ ------------ ------
14,535,486 19,857,261 7.5
Property & Casualty 20,159 Samsung Fire & Marine Insurance 5,329,667 7,695,279 2.9
Insurance
Steel 171,930 Pohang Iron & Steel Company,
Ltd. (ADR)* 2,851,900 3,073,249 1.1
Utilities-- 217,370 Korea Electric Power Corporation 3,842,797 5,248,085 2.0
Electric & Gas 360,450 Korea Electric Power
Corporation (ADR)* 4,342,498 4,573,209 1.7
------------ ------------ ------
8,185,295 9,821,294 3.7
Total Long-Term Investments
in South Korea 32,274,998 41,813,538 15.7
Taiwan Banking 2,938,000 Bank Sinopac 1,269,856 1,632,222 0.6
Electronics 1,520,000 Advanced Semiconductor
Engineering Inc. 2,919,845 3,579,710 1.3
793,000 Compeq Manufacturing Co., Ltd. 5,187,329 3,783,031 1.4
853,000 Hon Hai Precision Industry 4,403,365 4,558,605 1.7
1,924,000 Taiwan Semiconductor Manufacturing
Company 4,209,547 6,041,546 2.3
------------ ------------ ------
16,720,086 17,962,892 6.7
Footwear 1,085,000 Pou Chen Corporation 2,859,658 2,325,936 0.9
Insurance 1,147,000 Cathay Life Insurance Co., Ltd. 3,896,167 3,705,586 1.4
Retail 936,000 President Chain Store Corp. 2,909,010 2,896,739 1.1
Textiles 803,000 Nien Hsing Textile Corporation Ltd. 1,770,503 1,551,691 0.6
Total Long-Term Investments
in Taiwan 29,425,280 30,075,066 11.3
Thailand Banking US$ 3,689,000 Bangkok Bank Public Company
Limited, 4.589% due 3/03/2004 (a) 1,496,880 1,696,940 0.6
1,202,000 Thai Farmers Bank Public Company
Limited 'Foreign' 1,694,499 2,436,053 0.9
------------ ------------ ------
3,191,379 4,132,993 1.5
Oil & Gas 466,675 PTT Exploration and Production
Public Company Limited 'Foreign' 4,896,137 3,633,843 1.3
Publishing & 758,438 BEC World Public Company
Broadcasting Limited 'Foreign' 3,563,433 3,680,952 1.4
Telecommunications 538,402 Advanced Info Service Public
Company Limited 'Foreign' 2,914,500 3,905,209 1.5
Total Long-Term Investments
in Thailand 14,565,449 15,352,997 5.7
Total Long-Term Investments 240,166,173 249,045,874 93.2
Face
Amount Short-Term Investments
United States Commercial US$ 5,122,000 General Electric Capital Corp.,
Paper** 5.08% due 4/01/1999 5,122,000 5,122,000 1.9
US Government 5,000,000 Federal Home Loan Mortgage
Agency Obligations** Corporation, 4.77% due 4/06/1999 4,996,688 4,996,688 1.9
Total Short-Term Investments 10,118,688 10,118,688 3.8
Total Investments $ 250,284,861 259,164,562 97.0
=============
Unrealized Appreciation on Forward Foreign Exchange Contracts *** 281,247 0.1
Other Assets Less Liabilities 7,630,983 2.9
------------ ------
Net Assets $267,076,792 100.0%
============ ======
Net Asset Value: Class A--Based on net assets of $14,046,334
and 1,909,756 shares outstanding $ 7.36
============
Class B--Based on net assets of $181,316,536
and 25,311,126 shares outstanding $ 7.16
============
Class C--Based on net assets of $14,385,382
and 2,038,953 shares outstanding $ 7.06
============
Class D--Based on net assets of $57,328,540
and 7,803,079 shares outstanding $ 7.35
============
<FN>
(a)Convertible security.
++Effective February 16, 1999, the Fund's Board of Directors adopted
a change in valuation for Malaysian securities. The Fund will
utilize a Malaysian exchange rate of 3.80 and the value of any
investments made before February 15, 1999 will be discounted, based
upon its value as of August 31, 1998, by 30% through March 31, 1999,
20% from April 1, 1999 through May 31, 1999 and 10% from June 1,
1999 through August 31, 1999. These changes are due to the capital
controls implemented by the Malaysian government, which froze the
Malaysian ringgit at 3.80 until September 1, 1999 and initiated a
tax at various rates, as described above, on any funds repatriated
from Malaysia.
*American Depositary Receipts (ADR).
**Commercial Paper and certain US Government Agency Obligations are
traded on a discount basis; the interest rates shown reflect the
discount rates paid at the time of purchase by the Fund.
***Forward foreign exchange contracts as of March 31, 1999 were as
follows:
Foreign Expiration Unrealized
Currency Sold Date Appreciation
THB 296,000,000 May 1999 $ 114,353
THB 174,000,000 June 1999 166,894
------------
Total Unrealized Appreciation on Forward
Foreign Exchange Contracts--Net
(US$ Commitment--$12,800,000) $ 281,247
============
</TABLE>
Merrill Lynch Dragon Fund, Inc., March 31, 1999
PORTFOLIO INFORMATION
Investments
As of 3/31/99
Ten Largest Equity Holdings Percent of
Represented in the Portfolio Net Assets
Hutchison Whampoa Limited 8.0%
HSBC Holdings PLC 7.3
Cheung Kong (Holdings) Ltd. 5.9
Samsung Electronics Co., Ltd. 4.0
Samsung Display Devices Co., Ltd. 3.5
Samsung Fire & Marine Insurance 2.9
Singapore Airlines Ltd. 'Foreign' 2.6
Hong Kong Telecommunications Ltd. (ADR) 2.6
Sun Hung Kai Properties Ltd. 2.4
Taiwan Semiconductor Manufacturing Company 2.3
Ten Largest Industries Percent of
Represented in the Portfolio Net Assets
Electronics 16.7%
Banking 15.0
Utilities--Electric & Gas 9.6
Real Estate 9.2
Conglomerates 8.8
Telecommunications 7.8
Publishing & Broadcasting 5.5
Retail 3.0
Property & Casualty Insurance 2.9
Airlines 2.6
EQUITY PORTFOLIO CHANGES
For the Quarter Ended March 31, 1999
Additions
Bank Sinopac
Cheil Jedang Corp.
Dairy Farm International
Korea Electric Power Corporation (ADR)
PT Indofood Sukses Makmur Tbk
PT Telekomunikasi Indonesia (ADR)
Pacific Internet Ltd.
Philippine Long Distance Telephone Company (ADR)
San Miguel Corporation 'B'
Singapore Technologies Engineering Ltd.
Deletions
Bangkok Bank Public Company Limited 'Foreign'
Beijing Datang Power Generation Company Limited
Cheung Kong Infrastructure Holdings Limited
Electricity Generating Public Company Limited 'Foreign'
Fubon Insurance Co., Ltd. (GDR)
Gulf Indonesia Resources Ltd. (ADR)
Hana Microelectronics Public Company Limited 'Foreign'
Housing Development Finance Corporation Ltd. (HDFC)
Huaneng Power International, Inc. (ADR)
International Container Terminal Services, Inc. (ICTSI)
Mahanagar Telephone Nigam Ltd. (GDR)
Swire Pacific Ltd. 'B'
OFFICERS AND DIRECTORS
Terry K. Glenn, President and Director
Donald Cecil, Director
Roland M. Machold, Director
Edward H. Meyer, Director
Charles C. Reilly, Director
Richard R. West, Director
Arthur Zeikel, Director
Edward D. Zinbarg, Director
Kara W.Y. Tan Bhala, Senior Vice President and
Portfolio Manager
Donald C. Burke, Vice President and Treasurer
Phillip Gillespie, Secretary
Gerald M. Richard, Treasurer and Norman R. Harvey, Senior Vice
President of Merrill Lynch Dragon Fund, Inc. have recently retired.
Their colleagues at Merrill Lynch Asset Management, L.P. join the
Fund's Board of Directors in wishing Mr. Richard and Mr. Harvey well
in their retirements.
Custodian
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02109
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
