I did a video to show the actual behavior of S1 when I use pack folders with audio tracks and with multitrack VST instruments.
https://1drv.ms/v/s!Aq-LhvB5bzzagftI2HtNx4DPKRax7w
There's only one arrange track so the other mixer channels for that instrument don't get "hidden" in the mixer. If you check Link Expand/Collapse of Folder tracks with Show/Hide it only folders up channels where there associated arrange tracks.
I think it's a very good idea to have the option of to "hide/show tracks" using pack folder, working with multitrack instrument tracks like S1 does with audio tracks.
I think this is the right and intuitive behavior.