I believe you can easily annex them, but you also fail to recognize that the UK can buy ludicrous amounts of rubber per factory from them and that 80% of their civs go to the UK.
It costs time and PP to annex them. PP you did not have to spend before.
They have very few factory slots, so all that CIC they earn from selling to foreign countries can't be used to fill slots at home. Which is what you would do before.
They use their own crappy tech to build factories and RADAR and other stuff. You want a level 3 RADAR in Singapore? Too bad, Malaysia doesn't have the tech for level 3 RADAR, even if you were going to build it for them.
Even at the cheap prices you pay for rubber, you still end up using precious CIC as Britain to get rubber from Malaysia.
The other resources Malaysia produces are also important, and the UK doesn't get to sell them either.
And Malaysia uses her crappy tech to produce resources.
I don't disagree with Paradox's decision, but let's not pretend it didn't hurt the UK.