• Visitation at Macau casinos is down roughly 70% versus last year because of the coronavirus.
  • The virus should serve as a wake-up call that China and other Asian markets need to legalize online gambling, says a casino expert.

The coronavirus that started in Wuhan, China, has hit hard the Macau casino business during the peak holiday season of the Lunar New Year. That has led one gaming industry expert to say the ripple effect of the virus and fears of a pandemic, including quarantines and travel warnings and restrictions, should be a "wake-up call" for the Chinese government and casino interests throughout Asia that it is time to legalize online gambling.

Jason Ader, managing partner at SpringOwl Asset Management and a former board member at Las Vegas Sands, said the most interesting observation he has had as the coronavirus situation evolves is how the virus has pushed gamblers to illegal online gambling and the one market in Asia where online gambling is legal: the Philippines.

"Daily online gambling is up 90% over the Lunar New Year holiday compared to last year," Ader told CNBC's "Squawk Box" on Tuesday. "That's an unbelievable number, and it raises the issue of should land-based operators be converging around the world with online operators. That's really the growing trend," he said.

Online gambling is mostly unregulated in Asia and illegal in China.

"Asia is still very much the Wild West, it's very unregulated, but [the land-based operators] are not getting any business. The online operators and Philippines licensees are picking up most of these players," said Ader, who was a top-ranked gaming analyst at Bear Stearns for more than a decade. "I think it's a wake-up call, not just in Asia but in the U.S. ... The European companies are in leading positions."

Macau casinos are still open, but employees who interact with customers must wear masks, and they have detailed cleaning and hygiene in both front and back of the house. The chief executive of Macau has the option of closing these casinos if the outbreak intensifies.

As of Wednesday morning in Asia, China has mushroomed to more than 6,060 cases, exceeding the total number of SARS cases in that country during the 2002–2003 epidemic. There have been 132 deaths.

Meanwhile, shares of these gaming companies have been punished, with Las Vegas Sands, MGM Resorts and Wynn Resorts all experiencing double-digit percentage declines. Las Vegas Sands and Wynn generate as much as 65%–75% of revenue in Macau; for MGM it is closer to one-quarter of revenue.

Threats remain for casinos in other parts of Asia, including Singapore, where Las Vegas Sands has its biggest casino. Singapore had reported four infections of the coronavirus as of early Wednesday morning in Asia.

"Once it starts spreading ... other casinos can get hit," Ader said.

A staff member checks the temperature of a guest entering the casino of the New Orient Landmark hotel in Macau on January 22, 2020, after the former Portuguese colony reported its first case of the new SARS-like virus that originated from Wuhan in China.

He said governments in Asia should note that the trend in Europe and the U.S. is to legalize online gambling and implement higher taxes and more regulation.

"In Asia all this is lost business and tax revenue. Legalize it, tax it ... allow the Macau licensees to participate," Ader said.

One of the issues the Macau operators face in considering the issue of online gaming is that Macau has not become a general tourist destination like Las Vegas, which now generates significant non-gambling revenue.

MGM Resorts and Wynn Resorts declined to comment. Las Vegas Sands did not respond to a request for comment.

The outlook for this Lunar New Year was not great, with expectations for business to be flat to slightly down. But it is the busiest period for casinos, and daily play can be double what is typical. "Now you look around and casinos in Macau are sparse or closed, dealers are wearing masks," Ader said.

There had been seven coronavirus infections reported in Macau as of Wednesday morning. Ader said it is too early to know whether the casinos should all be closed and all are taking extraordinary precautions.

"Las Vegas Sands and MGM Resorts said they are following government ordered precautions to a tee," CNBC's Contessa Brewer added on Squawk Box.

"We're right at the precipice of where they wonder if it is worth staying open," Ader said. "But the mentality in the casino industry is 24/7 you stay open, the goal of operators is to stay open."