Templeton Dragon Fund : Annual Report

ANNUAL REPORT

TEMPLETON DRAGON FUND, INC.

December 31, 2021

Contents
Annual Report
Templeton Dragon Fund, Inc. ................................................	2
Performance Summary..........................................................	5
Consolidated Financial Highlights and Consolidated
Statement of Investments......................................................	8
Consolidated Financial Statements.....................................	13
Notes to Consolidated Financial Statements.......................	16
Report of Independent Registered
Public Accounting Firm ........................................................	24
Tax Information ....................................................................	25
Important Information to Shareholders................................	26
Annual Meeting of Shareholders .........................................	31
Dividend Reinvestment and Cash Purchase Plan...............	32
Board Members and Officers...............................................	34
Shareholder Information ......................................................	39

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Not FDIC Insured May Lose Value No Bank Guarantee

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ANNUAL REPORT

Templeton Dragon Fund, Inc.

Dear Shareholder:

This annual report for Templeton Dragon Fund, Inc. covers the fiscal year ended December 31, 2021.

Your Fund's Goal and Main Investments

The Fund seeks long-term capital appreciation by investing at least 45% of its total assets in equity securities of "China companies."

Performance Overview

The Fund posted cumulative total returns of -17.83% in market price terms and -15.52% in net asset value terms for the 12 months under review. You can find the Fund's long-term performance data in the Performance Summary on page 5.

Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown.

Geographic Composition 12/31/21

	% of Total
	Net Assets
China	97.9%
Other	0.9%
Short-Term Investments & Other Net Assets	1.2%

Chinese equities declined significantly during the period. New regulations of internet, education and property companies, enacted under the government's "common prosperity" campaign, weighed on stocks throughout 2021. A debt crisis at a major Chinese property developer, new U.S. government restrictions on investments in Chinese companies and the global spread of the COVID-19 Delta and Omicron variants also weighed on stocks. In this environment, the MSCI China All Shares Total Return Index-NR, which measures the performance of China share classes listed in Hong Kong, Shanghai, Shenzhen and outside of China, posted a -12.91% total return, and the MSCI China Index-NR posted a -21.72% total return for the 12 months ended December 31, 2021.1

Investment Strategy

Economic and Market Overview

China's economy continued to grow during the 12 months ended December 31, 2021, though it faced several challenges as the period progressed. Throughout 2021, the Chinese government's "zero-COVID-19" policy led to strict lockdowns to contain outbreaks of the virus, which particularly hurt consumer spending. Year-on-year growth accelerated in 2021's first quarter to an all-time record high-albeit compared to the contraction in 2020's first quarter-due to strengthening domestic and global demand and continued supportive government policy. Growth then moderated in 2021's second, third and fourth quarters due to supply chain issues, domestic COVID-19 outbreaks, power shortages and a speculative bubble in the property market.

The People's Bank of China cut its benchmark loan prime rate in December 2021, the first cut since April 2020, and made multiple cash injections into the banking system in the second half of the period to support liquidity.

1. Source: Morningstar.

Our investment strategy employs a fundamental, value- oriented, long-term approach. In selecting companies for investment, we will consider overall growth prospects, competitive positions in export markets, technologies, research and development, productivity, labor costs, and raw material costs and sources. Additional considerations include profit margins, returns on investment, capital resources, government regulation, management and other factors in comparison to other companies around the world that we believe are comparable.

Our approach to selecting investments emphasizes fundamental, company-by-company analysis (rather than broader analyses of specific industries or sectors of the economy), to construct an "action list" from which we make our buy decisions. Although we will consider historical value measures, the primary factor in selecting securities for investment by the Fund will be the company's current price relative to its long-term earnings potential.

The indexes are unmanaged and include reinvestment of any income or distributions. They do not reflect any fees, expenses or sales charges. One cannot invest directly in an index, and an index is not representative of the Fund's portfolio. Net Returns (NR) include income net of tax withholding when dividends are paid.

See www.franklintempletondatasources.com for additional data provider information.

The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund's Consolidated Statement of Investments (SOI). The Consolidated SOI begins on page 9.

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Top 10 Holdings 12/31/21

Company	% of Total
Industry, Country	Net Assets
Tencent Holdings Ltd.	8.2%
Interactive Media & Services, China
Alibaba Group Holding Ltd.	5.6%
Internet & Direct Marketing Retail, China
China Merchants Bank Co. Ltd.	4.7%
Banks, China
JD.com, Inc.	3.1%
Internet & Direct Marketing Retail, China
Meituan Dianping	3.0%
Internet & Direct Marketing Retail, China
ANTA Sports Products Ltd.	3.0%
Textiles, Apparel & Luxury Goods, China
Guangzhou Tinci Materials Technology Co. Ltd.	2.7%
Chemicals, China
WuXi AppTec Co. Ltd.	2.6%
Life Sciences Tools & Services, China
Hongfa Technology Co. Ltd.	2.4%
Electrical Equipment, China
Wuxi Biologics Cayman, Inc.	2.4%
Life Sciences Tools & Services, China

Manager's Discussion

Key contributors to absolute performance during the reporting period were Beijing Oriental Yuhong Waterproof Technology, Guangzhou Tinci Materials Technology (GTMT) and Sino Wealth Electronic.

China-based Beijing Oriental Yuhong Waterproof Technology is one of the largest waterproofing system providers in Asia. Its products and services have been exported to more than 100 countries globally. The company reported solid revenue and net earnings growth, supported by market share expansion in the waterproof business along with growth in new business avenues. Expectations that the development and growing demand of distributed photovoltaics (PV) could drive demand for polymer coils, an area in which we believe the company is well-positioned, further supported sentiment in the stock.

Shares of China-based GTMT, a world-leading battery electrolyte producer, soared. Following better-than-expectedfirst-half 2021 earnings, the company's third-quarter earnings showed a massive profit leap amid strong demand and soaring profits. Plans to build two plants to expand its capacity and the announcement of a supply agreement with a major electric vehicle (EV) battery maker in China was also viewed positively by investors. An improving outlook for EV adoption also buoyed the stock. Shares corrected in the final two months of 2021, however, due to profit-taking after more than tripling to a record high over the previous six months. In

TEMPLETON DRAGON FUND, INC.

our view, GTMT's competitive advantages should position it to benefit from robust demand for batteries needed for EVs and energy storage.

Sino Wealth Electronic is an integrated chip design company in China. Its main products include microcontroller (MCU) and lithium battery management chips, which are used

in products such as small household appliances and automotive electronics. The company also provides related systematic solutions and after-sale technical supporting services. Shares advanced sharply throughout much

of 2021, as investors sought companies that stand to benefit from government support and/or remain insulated from regulatory crackdowns, including those tied to semiconductors and automation. Sino Wealth Electronic also consistently reported solid quarterly revenue and earnings growth in 2021.

In contrast, key absolute detractors included Alibaba Group Holding, New Oriental Education & Technology Group and Tencent Holdings.

Alibaba is the leading e-commerce company in China. It also provides cloud computing services and is involved in logistics services. Tencent is one of the largest online gaming companies in the world and operates the most popular messaging application with social network features in China. As a major internet company in China, it also provides non- gaming value added services, digital advertising, financial technology and other services. China's increased scrutiny of monopolistic practices, personal data protection, content release, online platform's social responsibilities, financial technology and other areas in the internet industry weighed on both companies.

Despite Alibaba reporting solid second- and third-quarter 2021 revenue growth, a downward revision in fiscal year 2022 revenue guidance amid a weak consumption environment and intensifying competition in China's e-commerce market disappointed investors. However, a substantial increase in the company's share repurchase program, the largest buyback program in the company's history, signaled continued management confidence. The organizational restructure in late 2021 also suggested management actively took actions to meet these challenges. Although further regulatory news could drive share-price volatility in the near term, Alibaba is generally viewed as well-diversified and resilient, with longer-term growth drivers across multiple areas such as domestic retail, international e-commerce, cloud computing and other enterprise services.

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TEMPLETON DRAGON FUND, INC.

Although Tencent reported continued growth in quarterly revenue, third-quarter 2021 corporate results missed market expectations. Regulatory and macroeconomic headwinds especially impacted growth in online advertising revenues. Tencent declared a special dividend in the form of shares of Chinese e-commerce company JD.com (also held by the Fund), which would reduce Tencent's holding in JD.com,

in December 2021, unlocking value for shareholders and providing capital to fund other investment and social initiatives. Reducing its investment in other internet companies could also reduce potential concerns on Tencent from an anti-trust regulatory perspective. Although further regulatory changes could result in some volatility in the short-term, we believe strength in Tencent's core gaming and social businesses, and longer-term monetization opportunities in its enterprise services and other services bode well for the company's longer-term future.

Tighter regulations in China's after-school tutoring (AST) industry weighed on shares of New Oriental Education

• Technology, a leading provider of private education services in the country, as well as the industry in general. The implications of the new policy made it evident to us that the existing AST business model was no longer viable. It became unclear how the businesses would restructure to satisfy key regulatory requirements (not-for-profit and no foreign investment), and necessary operational changes to the business model would likely take an extended period of time to resolve. As a result, we exited the position.

In the past 12 months, the Fund continued to focus on identifying companies with sustainable earnings power trading at a discount to their intrinsic worth. New additions to the portfolio included Hua Hong Semiconductor, a Chinese semiconductor manufacturer, Daqo New Energy, a Chinese manufacturer of polysilicon for solar power equipment, and Nio, a major Chinese electric vehicle manufacturer. We also added to existing investments in Chinese clinical-stage biopharmaceutical companies I-Mab and InnoCare Pharma. In terms of sectors, holdings in information technology were increased the most.

In contrast, the Fund reduced its holdings in the consumer discretionary, health care and real estate sectors due to the availability of what we viewed as more attractive investment opportunities. The Fund's investments in the domestic "A" share markets, which were held through the dedicated "Templeton China Opportunities Fund," were decreased.

In terms of key sales, we divested our positions in Anhui Conch Cement, a Chinese cement producer, Vipshop Holdings, an online discount retailer for brands in China, and

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the aforementioned New Oriental Education & Technology. Holdings in Wuxi Biologics Cayman, a Chinese biologics company, China Resources Land, a Chinese property investment and development company, and the previously mentioned Tencent were also reduced as we continued to realign the portfolio.

Thank you for your continued participation in Templeton Dragon Fund. We look forward to serving your future investment needs.

Sincerely,

Michael Lai, CFA

Lead Portfolio Manager

Erik Mok

Portfolio Manager

The foregoing information reflects our analysis, opinions and portfolio holdings as of December 31, 2021, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.

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