I believe it depends on whether win32pad.ini (pre)exists.
Like if it does not exist, it will default to %APPDATA%.
But if it does, it will use the copy found in the win32pad.exe directory & forget %APPDATA%.
This is true; even an empty win32pad.ini in the Exe's directory is written on exit.
So it's still a doc bug in readme.txt.
IMHO the sentence from history.txt, version 1.5.8, can be taken:
Added code to be Windows XP compliant. It will read/write to user's Application
directory if win32pad.ini is not found in the same directory as win32pad.exe