"Can a watch constructed outside of Rolex factory but with all genuine parts be called a genuine rolex?"
I would say yes because it is all genuine. Like I have said before, there are probably thousands of these watches in circulation and I remember 20+ years ago when many 'big time dealers' would buy 10 or 20 similar genuine rolex watches at watch shows (mostly tutone DJ) and mix and match parts to put the best of the best together to sell at premium prices and watches in not as good condition were put together in descending levels of quality and sold at lower prices. This still goes on. Do not doubt it, just not tutones now.
Where do a lot of the highest quality, high $$ 1016/5512/13/1680 etc come from? Many come from a stash of parts. Example: I have a nos 1570 movement and a couple nos tritium 1016 dial and hand sets plus nos crowns, case tubes, crystals, etc.. What is to keep me from putting it in a super fine case, claim it is 'like new' and sell it for a high price? Nothing really. It just never happened.
"How much is too much?"
I figure 'Frankensteins' are not much of a loss if: 1. You can do the work yourself and not pay out a lot of labor costs. 2. You can sell the watch on the forum for minimum or no loss. 3. The parts are worth close to what you have in the watch if you want to part it out. A 5512/13/1680 in a Yuki or MBK case, Yuki etc dial/hands with a 1520/60/70 (holding movement cost to around $1000), and a good bracelet is not a bad 'investment' for around $2000 for an everyday watch. It sure beats a genuine 5512/13/1680 etc with a ratty dial/hands, tired movement, rotted out case, and stretch-o-matic 'parts is parts' oyster bracelet for $7k or more.