1) A 777 has at least two transponders, if not three. One transponder inop does not make the plane disappear or fall out of the sky. The Air India 777 return after departure makes sense, because if the second transponder would have failed on a 15 hours flight it may have needed to land somewhere, where it would not like to be. Most FIRs over land do not allow to fly without transponder anymore, think of TCAS.
2) The primary radar of Malaysia is far from covering the whole area and peninsula. There are big gaps. This is the biggest problem for the Air Force chiefs to admit. It is even doubtful if the last position spot is under primary surveilance.
3) The suspect plane at 02.15 LT 200 km Northwest of Penang was likely SIA68 at FL300. It is standard for SIN departure traffic to Europe to fly through that area that low for the first three hours due to weight.
4) The Chinese crash site is not in any territorial waters. Territorial waters do not extend beyond 12 NM.
5) The Kiwi sighting was west and probably at a spot well above the horizon. The Chinese site would be SouthSouthWest and well below the horizon.